G.R. No.
141994             January 17, 2005 xxx
FILIPINAS BROADCASTING NETWORK,
INC., petitioner,
vs.
AGO MEDICAL AND EDUCATIONAL
CENTER-BICOL CHRISTIAN COLLEGE OF
MEDICINE, (AMEC-BCCM) and ANGELITA F.
AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the 4 January 1999
Decision2 and 26 January 2000 Resolution of the
Court of Appeals in CA-G.R. CV No. 40151. The
Court of Appeals affirmed with modification the 14
December 1992 Decision3 of the Regional Trial Court
of Legazpi City, Branch 10, in Civil Case No. 8236.
The Court of Appeals held Filipinas Broadcasting
Network, Inc. and its broadcasters Hermogenes
Alegre and Carmelo Rima liable for libel and ordered
them to solidarily pay Ago Medical and Educational
Center-Bicol Christian College of Medicine moral
damages, attorney’s fees and costs of suit.
The Antecedents
"Exposé" is a radio documentary4 program hosted by
Carmelo ‘Mel’ Rima ("Rima") and Hermogenes ‘Jun’
Alegre ("Alegre").5 Exposé is aired every morning
over DZRC-AM which is owned by Filipinas
Broadcasting Network, Inc. ("FBNI"). "Exposé" is
heard over Legazpi City, the Albay municipalities and
other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima
and Alegre exposed various alleged complaints from
students, teachers and parents against Ago Medical
and Educational Center-Bicol Christian College of
Medicine ("AMEC") and its administrators. Claiming
that the broadcasts were defamatory, AMEC and
Angelita Ago ("Ago"), as Dean of AMEC’s College
of Medicine, filed a complaint for damages7 against
FBNI, Rima and Alegre on 27 February 1990. Quoted
are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have
children taking medical course at AMEC-BCCM,
advise them to pass all subjects because if they fail
in any subject they will repeat their year level,
taking up all subjects including those they have
passed already. Several students had approached me
stating that they had consulted with the DECS which
told them that there is no such regulation. If [there] is
no such regulation why is AMEC doing the same?
Second: Earlier AMEC students in Physical
Therapy had complained that the course is not
recognized by DECS. xxx
Third: Students are required to take and pay for
the subject even if the subject does not have an
instructor - such greed for money on the part of
AMEC’s administration. Take the subject Anatomy:
students would pay for the subject upon enrolment
because it is offered by the school. However there
would be no instructor for such subject. Students
would be informed that course would be moved to a
later date because the school is still searching for the
appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and
Educational Center has survived and has been
surviving for the past few years since its inception
because of funds support from foreign foundations. If
you will take a look at the AMEC premises you’ll find
out that the names of the buildings there are foreign
soundings. There is a McDonald Hall. Why not Jose
Rizal or Bonifacio Hall? That is a very concrete and
undeniable evidence that the support of foreign
foundations for AMEC is substantial, isn’t it? With
the report which is the basis of the expose in DZRC
today, it would be very easy for detractors and
enemies of the Ago family to stop the flow of support
of foreign foundations who assist the medical school
on the basis of the latter’s purpose. But if the purpose
of the institution (AMEC) is to deceive students at
cross purpose with its reason for being it is possible
for these foreign foundations to lift or suspend their
donations temporarily.8
xxx
On the other hand, the administrators of AMEC-
BCCM, AMEC Science High School and the
AMEC-Institute of Mass Communication in their
effort to minimize expenses in terms of salary are
absorbing or continues to accept "rejects". For
example how many teachers in AMEC are former
teachers of Aquinas University but were removed
because of immorality? Does it mean that the present
administration of AMEC have the total definite moral
foundation from catholic administrator of Aquinas
University. I will prove to you my friends,
that AMEC is a dumping ground, garbage, not
merely of moral and physical misfits. Probably they
only qualify in terms of intellect. The Dean of Student
Affairs of AMEC is Justita Lola, as the family name
implies. She is too old to work, being an old woman.
Is the AMEC administration exploiting the very
[e]nterprising or compromising and undemanding
Lola? Could it be that AMEC is just patiently making
use of Dean Justita Lola were if she is very old. As in
atmospheric situation – zero visibility – the plane
cannot land, meaning she is very old, low pay follows.
By the way, Dean Justita Lola is also the chairman of
the committee on scholarship in AMEC. She had
retired from Bicol University a long time ago but
AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a
dumping ground for moral and physically misfit
people. What does this mean? Immoral and physically
misfits as teachers.
May I say I’m sorry to Dean Justita Lola. But this is
the truth. The truth is this, that your are no longer fit
to teach. You are too old. As an aviation, your case is
zero visibility. Don’t insist.
xxx Why did AMEC still absorb her as a teacher, a
dean, and chairman of the scholarship committee at
that. The reason is practical cost saving in salaries,
because an old person is not fastidious, so long as she
has money to buy the ingredient of beetle juice. The
elderly can get by – that’s why she (Lola) was taken
in as Dean.
xxx
xxx On our end our task is to attend to the interests of
students. It is likely that the students would be
influenced by evil. When they become members of
society outside of campus will be liabilities rather
than assets. What do you expect from a doctor who
while studying at AMEC is so much burdened with
unreasonable imposition? What do you expect from a
student who aside from peculiar problems – because
not all students are rich – in their struggle to improve
their social status are even more burdened with false
regulations. xxx9 (Emphasis supplied)
The complaint further alleged that AMEC is a
reputable learning institution. With the supposed
exposés, FBNI, Rima and Alegre "transmitted
malicious imputations, and as such, destroyed
plaintiffs’ (AMEC and Ago) reputation." AMEC and
Ago included FBNI as defendant for allegedly failing
to exercise due diligence in the selection and
supervision of its employees, particularly Rima and
Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through
Atty. Rozil Lozares, filed an Answer10 alleging that
the broadcasts against AMEC were fair and true.
FBNI, Rima and Alegre claimed that they were
plainly impelled by a sense of public duty to report
the "goings-on in AMEC, [which is] an institution
imbued with public interest."
Thereafter, trial ensued. During the presentation of the
evidence for the defense, Atty. Edmundo Cea,
collaborating counsel of Atty. Lozares, filed a Motion
to Dismiss11 on FBNI’s behalf. The trial court denied
the motion to dismiss. Consequently, FBNI filed a
separate Answer claiming that it exercised due
diligence in the selection and supervision of Rima and
Alegre. FBNI claimed that before hiring a
broadcaster, the broadcaster should (1) file an
application; (2) be interviewed; and (3) undergo an
apprenticeship and training program after passing the
interview. FBNI likewise claimed that it always
reminds its broadcasters to "observe truth, fairness
and objectivity in their broadcasts and to refrain from
using libelous and indecent language." Moreover,
FBNI requires all broadcasters to pass the Kapisanan
ng mga Brodkaster sa Pilipinas ("KBP") accreditation
test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a
Decision12 finding FBNI and Alegre liable for libel
except Rima. The trial court held that the broadcasts
are libelous per se. The trial court rejected the
broadcasters’ claim that their utterances were the
result of straight reporting because it had no factual
basis. The broadcasters did not even verify their
reports before airing them to show good faith. In
holding FBNI liable for libel, the trial court found that
FBNI failed to exercise diligence in the selection and
supervision of its employees.
In absolving Rima from the charge, the trial court
ruled that Rima’s only participation was when he
agreed with Alegre’s exposé. The trial court found
Rima’s statement within the "bounds of freedom of
speech, expression, and of the press." The dispositive
portion of the decision reads:
WHEREFORE, premises considered, this court finds
for the plaintiff. Considering the degree of damages
caused by the controversial utterances, which are
not found by this court to be really very serious
and damaging, and there being no showing that
indeed the enrollment of plaintiff school
dropped, defendants Hermogenes "Jun" Alegre, Jr.
and Filipinas Broadcasting Network (owner of the
radio station DZRC), are hereby jointly and severally
ordered to pay plaintiff Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC-
BCCM) the amount of ₱300,000.00 moral damages,
plus ₱30,000.00 reimbursement of attorney’s fees, and
to pay the costs of suit.
SO ORDERED. 13 (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one
hand, and AMEC and Ago, on the other, appealed the
decision to the Court of Appeals. The Court of
Appeals affirmed the trial court’s judgment with
modification. The appellate court made Rima
solidarily liable with FBNI and Alegre. The appellate
court denied Ago’s claim for damages and attorney’s
fees because the broadcasts were directed against
AMEC, and not against her. The dispositive portion of
the Court of Appeals’ decision reads:
WHEREFORE, the decision appealed from is
hereby AFFIRMED, subject to the modification that
broadcaster Mel Rima is SOLIDARILY
ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.
SO ORDERED.14
FBNI, Rima and Alegre filed a motion for
reconsideration which the Court of Appeals denied in
its 26 January 2000 Resolution.
Hence, FBNI filed this petition.15
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial court’s ruling
that the questioned broadcasts are libelous per se and
that FBNI, Rima and Alegre failed to overcome the
legal presumption of malice. The Court of Appeals
found Rima and Alegre’s claim that they were
actuated by their moral and social duty to inform the
public of the students’ gripes as insufficient to justify
the utterance of the defamatory remarks.
Finding no factual basis for the imputations against
AMEC’s administrators, the Court of Appeals ruled
that the broadcasts were made "with reckless
disregard as to whether they were true or false." The
appellate court pointed out that FBNI, Rima and
Alegre failed to present in court any of the students
who allegedly complained against AMEC. Rima and
Alegre merely gave a single name when asked to
identify the students. According to the Court of
Appeals, these circumstances cast doubt on the
veracity of the broadcasters’ claim that they were
"impelled by their moral and social duty to inform the
public about the students’ gripes."
The Court of Appeals found Rima also liable for libel
since he remarked that "(1) AMEC-BCCM is a
dumping ground for morally and physically misfit
teachers; (2) AMEC obtained the services of Dean
Justita Lola to minimize expenses on its employees’
salaries; and (3) AMEC burdened the students with
unreasonable imposition and false regulations."16
The Court of Appeals held that FBNI failed to
exercise due diligence in the selection and supervision
of its employees for allowing Rima and Alegre to
make the radio broadcasts without the proper KBP
accreditation. The Court of Appeals denied Ago’s
claim for damages and attorney’s fees because the
libelous remarks were directed against AMEC, and
not against her. The Court of Appeals adjudged FBNI,
Rima and Alegre solidarily liable to pay AMEC moral
damages, attorney’s fees and costs of suit.1awphi1.nét
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE
LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO
MORAL DAMAGES;
III. WHETHER THE AWARD OF
ATTORNEY’S FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY
LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES,
ATTORNEY’S FEES AND COSTS OF
SUIT.
The Court’s Ruling
We deny the petition.
This is a civil action for damages as a result of the
allegedly defamatory remarks of Rima and Alegre
against AMEC.17 While AMEC did not point out
clearly the legal basis for its complaint, a reading of
the complaint reveals that AMEC’s cause of action is
based on Articles 30 and 33 of the Civil Code. Article
3018 authorizes a separate civil action to recover civil
liability arising from a criminal offense. On the other
hand, Article 3319 particularly provides that the
injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical
injuries. AMEC also invokes Article 1920 of the Civil
Code to justify its claim for damages. AMEC cites
Articles 217621 and 218022 of the Civil Code to hold
FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel23 is a public and malicious imputation of a
crime, or of a vice or defect, real or imaginary, or any
act or omission, condition, status, or circumstance
tending to cause the dishonor, discredit, or contempt
of a natural or juridical person, or to blacken the
memory of one who is dead.24
There is no question that the broadcasts were made
public and imputed to AMEC defects or
circumstances tending to cause it dishonor, discredit
and contempt. Rima and Alegre’s remarks such as
"greed for money on the part of AMEC’s
administrators"; "AMEC is a dumping ground,
garbage of xxx moral and physical misfits"; and
AMEC students who graduate "will be liabilities
rather than assets" of the society are libelous per se.
Taken as a whole, the broadcasts suggest that AMEC
is a money-making institution where physically and
morally unfit teachers abound.
However, FBNI contends that the broadcasts are not
malicious. FBNI claims that Rima and Alegre were
plainly impelled by their civic duty to air the students’
gripes. FBNI alleges that there is no evidence that ill
will or spite motivated Rima and Alegre in making the
broadcasts. FBNI further points out that Rima and
Alegre exerted efforts to obtain AMEC’s side and
gave Ago the opportunity to defend AMEC and its
administrators. FBNI concludes that since there is no
malice, there is no libel.
FBNI’s contentions are untenable.
Every defamatory imputation is presumed
malicious.  Rima and Alegre failed to show
25
adequately their good intention and justifiable motive
in airing the supposed gripes of the students. As hosts
of a documentary or public affairs program, Rima and
Alegre should have presented the public issues "free
from inaccurate and misleading
information."  Hearing
26
the students’ alleged
complaints a month before the exposé,27 they had
sufficient time to verify their sources and information.
However, Rima and Alegre hardly made a thorough
investigation of the students’ alleged gripes. Neither
did they inquire about nor confirm the purported
irregularities in AMEC from the Department of
Education, Culture and Sports. Alegre testified that he
merely went to AMEC to verify his report from an
alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the
students "because they were many and not because
there is proof that what they are saying is true." 28 This
plainly shows Rima and Alegre’s reckless disregard of
whether their report was true or not.
Contrary to FBNI’s claim, the broadcasts were not
"the result of straight reporting." Significantly, some
courts in the United States apply the privilege of
"neutral reportage" in libel cases involving matters of
public interest or public figures. Under this privilege,
a republisher who accurately and disinterestedly
reports certain defamatory statements made against
public figures is shielded from liability, regardless of
the republisher’s subjective awareness of the truth or
falsity of the accusation.29 Rima and Alegre cannot
invoke the privilege of neutral reportage because
unfounded comments abound in the broadcasts.
Moreover, there is no existing controversy involving
AMEC when the broadcasts were made. The privilege
of neutral reportage applies where the defamed person
is a public figure who is involved in an existing
controversy, and a party to that controversy makes the
defamatory statement.30
However, FBNI argues vigorously that malice in law
does not apply to this case. Citing Borjal v. Court of
Appeals,31 FBNI contends that the broadcasts "fall
within the coverage of qualifiedly privileged
communications" for being commentaries on matters
of public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC
allegedly failed to prove actual malice, there is no
libel.
FBNI’s reliance on Borjal is misplaced. In Borjal, the
Court elucidated on the "doctrine of fair comment,"
thus:
[F]air commentaries on matters of public interest are
privileged and constitute a valid defense in an action
for libel or slander. The doctrine of fair comment
means that while in general every discreditable
imputation publicly made is deemed false, because
every man is presumed innocent until his guilt is
judicially proved, and every false imputation is
deemed malicious, nevertheless, when the
discreditable imputation is directed against a public
person in his public capacity, it is not necessarily
actionable. In order that such discreditable
imputation to a public official may be actionable, it
must either be a false allegation of fact or a
comment based on a false supposition. If the
comment is an expression of opinion, based on
established facts, then it is immaterial that the
opinion happens to be mistaken, as long as it might
reasonably be inferred from the facts.32 (Emphasis
supplied)
True, AMEC is a private learning institution whose
business of educating students is "genuinely imbued
with public interest." The welfare of the youth in
general and AMEC’s students in particular is a matter
which the public has the right to know. Thus, similar
to the newspaper articles in Borjal, the subject
broadcasts dealt with matters of public interest.
However, unlike in Borjal, the questioned broadcasts
are not based on established facts. The record
supports the following findings of the trial court:
xxx Although defendants claim that they were
motivated by consistent reports of students and
parents against plaintiff, yet, defendants have not
presented in court, nor even gave name of a single
student who made the complaint to them, much less
present written complaint or petition to that effect. To
accept this defense of defendants is too dangerous
because it could easily give license to the media to
malign people and establishments based on flimsy
excuses that there were reports to them although they
could not satisfactorily establish it. Such laxity would
encourage careless and irresponsible broadcasting
which is inimical to public interests.
Secondly, there is reason to believe that defendant
radio broadcasters, contrary to the mandates of their
duties, did not verify and analyze the truth of the
reports before they aired it, in order to prove that they
are in good faith.
Alegre contended that plaintiff school had no permit
and is not accredited to offer Physical Therapy
courses. Yet, plaintiff produced a certificate coming
from DECS that as of Sept. 22, 1987 or more than 2
years before the controversial broadcast, accreditation
to offer Physical Therapy course had already been
given the plaintiff, which certificate is signed by no
less than the Secretary of Education and Culture
herself, Lourdes R. Quisumbing (Exh. C-rebuttal).
Defendants could have easily known this were they
careful enough to verify. And yet, defendants were
very categorical and sounded too positive when they
made the erroneous report that plaintiff had no permit
to offer Physical Therapy courses which they were
offering.
The allegation that plaintiff was getting tremendous
aids from foreign foundations like Mcdonald
Foundation prove not to be true also. The truth is there
is no Mcdonald Foundation existing. Although a big
building of plaintiff school was given the name
Mcdonald building, that was only in order to honor
the first missionary in Bicol of plaintiffs’ religion, as
explained by Dr. Lita Ago. Contrary to the claim of
defendants over the air, not a single centavo appears
to be received by plaintiff school from the
aforementioned McDonald Foundation which does
not exist.
Defendants did not even also bother to prove their
claim, though denied by Dra. Ago, that when medical
students fail in one subject, they are made to repeat all
the other subject[s], even those they have already
passed, nor their claim that the school charges
laboratory fees even if there are no laboratories in the
school. No evidence was presented to prove the bases
for these claims, at least in order to give semblance of
good faith.
As for the allegation that plaintiff is the dumping
ground for misfits, and immoral teachers, defendant[s]
singled out Dean Justita Lola who is said to be so old,
with zero visibility already. Dean Lola testified in
court last Jan. 21, 1991, and was found to be 75 years
old. xxx Even older people prove to be effective
teachers like Supreme Court Justices who are still
very much in demand as law professors in their late
years. Counsel for defendants is past 75 but is found
by this court to be still very sharp and
effective.l^vvphi1.net So is plaintiffs’ counsel.
Dr. Lola was observed by this court not to be
physically decrepit yet, nor mentally infirmed, but is
still alert and docile.
The contention that plaintiffs’ graduates become
liabilities rather than assets of our society is a mere
conclusion. Being from the place himself, this court is
aware that majority of the medical graduates of
plaintiffs pass the board examination easily and
become prosperous and responsible professionals.33
Had the comments been an expression of opinion
based on established facts, it is immaterial that the
opinion happens to be mistaken, as long as it might
reasonably be inferred from the facts.34 However, the
comments of Rima and Alegre were not backed up by
facts. Therefore, the broadcasts are not privileged and
remain libelous per se.
The broadcasts also violate the Radio Code35 of
the Kapisanan ng mga Brodkaster sa Pilipinas,
Ink. ("Radio Code"). Item I(B) of the Radio Code
provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND
COMMENTARIES
1. x x x
4. Public affairs program shall present
public issues free from personal bias,
prejudice and inaccurate and misleading
information. x x x Furthermore, the station
shall strive to present balanced discussion of
issues. x x x.
xxx
7. The station shall be responsible at all times
in the supervision of public affairs, public
issues and commentary programs so that they
conform to the provisions and standards of
this code.
8. It shall be the responsibility of the
newscaster, commentator, host and announcer
to protect public interest, general welfare and
good order in the presentation of public
affairs and public issues.36 (Emphasis
supplied)
The broadcasts fail to meet the standards prescribed in
the Radio Code, which lays down the code of ethical
conduct governing practitioners in the radio broadcast
industry. The Radio Code is a voluntary code of
conduct imposed by the radio broadcast industry on its
own members. The Radio Code is a public warranty
by the radio broadcast industry that radio broadcast
practitioners are subject to a code by which their
conduct are measured for lapses, liability and
sanctions.
The public has a right to expect and demand that radio
broadcast practitioners live up to the code of conduct
of their profession, just like other professionals. A
professional code of conduct provides the standards
for determining whether a person has acted justly,
honestly and with good faith in the exercise of his
rights and performance of his duties as required by
Article 1937 of the Civil Code. A professional code of
conduct also provides the standards for determining
whether a person who willfully causes loss or injury
to another has acted in a manner contrary to morals or
good customs under Article 2138 of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral
damages because it is a corporation.39
A juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish or
moral shock.40 The Court of Appeals cites Mambulao
Lumber Co. v. PNB, et al.41 to justify the award of
moral damages. However, the Court’s statement
in Mambulao that "a corporation may have a good
reputation which, if besmirched, may also be a ground
for the award of moral damages" is an obiter dictum.42
Nevertheless, AMEC’s claim for moral damages falls
under item 7 of Article 221943 of the Civil Code. This
provision expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether
the plaintiff is a natural or juridical person. Therefore,
a juridical person such as a corporation can validly
complain for libel or any other form of defamation
and claim for moral damages.44
Moreover, where the broadcast is libelous per se, the
law implies damages.45 In such a case, evidence of an
honest mistake or the want of character or reputation
of the party libeled goes only in mitigation of
damages.46 Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a
condition precedent to the recovery of some
damages.47 In this case, the broadcasts are libelous per
se. Thus, AMEC is entitled to moral damages.
However, we find the award of ₱300,000 moral
damages unreasonable. The record shows that even
though the broadcasts were libelous per se, AMEC
has not suffered any substantial or material damage to
its reputation. Therefore, we reduce the award of
moral damages from ₱300,000 to ₱150,000.
III.
Whether the award of attorney’s fees is proper
FBNI contends that since AMEC is not entitled to
moral damages, there is no basis for the award of
attorney’s fees. FBNI adds that the instant case does
not fall under the enumeration in Article 220848 of the
Civil Code.
The award of attorney’s fees is not proper because
AMEC failed to justify satisfactorily its claim for
attorney’s fees. AMEC did not adduce evidence to
warrant the award of attorney’s fees. Moreover, both
the trial and appellate courts failed to explicitly state
in their respective decisions the rationale for the
award of attorney’s fees.49 In Inter-Asia Investment
Industries, Inc. v. Court of Appeals ,50 we held that:
[I]t is an accepted doctrine that the award thereof as
an item of damages is the exception rather than the
rule, and counsel’s fees are not to be awarded every
time a party wins a suit. The power of the court to
award attorney’s fees under Article 2208 of the
Civil Code demands factual, legal and equitable
justification, without which the award is a
conclusion without a premise, its basis being
improperly left to speculation and conjecture. In all
events, the court must explicitly state in the text of the
decision, and not only in the decretal portion thereof,
the legal reason for the award of attorney’s
fees.51 (Emphasis supplied)
While it mentioned about the award of attorney’s fees
by stating that it "lies within the discretion of the court
and depends upon the circumstances of each case," the
Court of Appeals failed to point out any circumstance
to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and
Alegre for moral damages, attorney’s fees and costs
of suit
FBNI contends that it is not solidarily liable with
Rima and Alegre for the payment of damages and
attorney’s fees because it exercised due diligence in
the selection and supervision of its employees,
particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a
"very regimented process" before they are allowed to
go on air. "Those who apply for broadcaster are
subjected to interviews, examinations and an
apprenticeship program."
FBNI further argues that Alegre’s age and lack of
training are irrelevant to his competence as a
broadcaster. FBNI points out that the "minor
deficiencies in the KBP accreditation of Rima and
Alegre do not in any way prove that FBNI did not
exercise the diligence of a good father of a family in
selecting and supervising them." Rima’s accreditation
lapsed due to his non-payment of the KBP annual fees
while Alegre’s accreditation card was delayed
allegedly for reasons attributable to the KBP Manila
Office. FBNI claims that membership in the KBP is
merely voluntary and not required by any law or
government regulation.
FBNI’s arguments do not persuade us.
The basis of the present action is a tort. Joint tort
feasors are jointly and severally liable for the tort
which they commit.52 Joint tort feasors are all the
persons who command, instigate, promote, encourage,
advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is
done, if done for their benefit.53 Thus, AMEC
correctly anchored its cause of action against FBNI on
Articles 2176 and 2180 of the Civil
Code.1a\^/phi1.net
As operator of DZRC-AM and employer of Rima and
Alegre, FBNI is solidarily liable to pay for damages
arising from the libelous broadcasts. As stated by the
Court of Appeals, "recovery for defamatory SO ORDERED.
statements published by radio or television may be
had from the owner of the station, a
licensee, the operator of the station, or a person who
procures, or participates in, the making of the
defamatory statements."54 An employer and employee
are solidarily liable for a defamatory statement by the
employee within the course and scope of his or her
employment, at least when the employer authorizes or
ratifies the defamation.55 In this case, Rima and
Alegre were clearly performing their official duties as
hosts of FBNI’s radio program Exposé when they
aired the broadcasts. FBNI neither alleged nor proved
that Rima and Alegre went beyond the scope of their
work at that time. There was likewise no showing that
FBNI did not authorize and ratify the defamatory
broadcasts.

Moreover, there is insufficient evidence on record that

FBNI exercised due diligence in
the selection and supervision of its employees,
particularly Rima and Alegre. FBNI merely showed
that it exercised diligence in the selection of its
broadcasters without introducing any evidence to
prove that it observed the same diligence in
the supervision of Rima and Alegre. FBNI did not
show how it exercised diligence in supervising its
broadcasters. FBNI’s alleged constant reminder to its
broadcasters to "observe truth, fairness and objectivity
and to refrain from using libelous and indecent
language" is not enough to prove due diligence in the
supervision of its broadcasters. Adequate training of
the broadcasters on the industry’s code of conduct,
sufficient information on libel laws, and continuous
evaluation of the broadcasters’ performance are but a
few of the many ways of showing diligence in the
supervision of broadcasters.

FBNI claims that it "has taken all the precaution in

the selection of Rima and Alegre as broadcasters,
bearing in mind their qualifications." However, no
clear and convincing evidence shows that Rima and
Alegre underwent FBNI’s "regimented process" of
application. Furthermore, FBNI admits that Rima and
Alegre had deficiencies in their KBP
accreditation,56 which is one of FBNI’s requirements
before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates
the broadcaster’s strong commitment to observe the
broadcast industry’s rules and regulations. Clearly,
these circumstances show FBNI’s lack of diligence in
selecting and supervising Rima and Alegre. Hence,
FBNI is solidarily liable to pay damages together with
Rima and Alegre.

WHEREFORE, we DENY the instant petition. We

AFFIRM the Decision of 4 January 1999 and
Resolution of 26 January 2000 of the Court of
Appeals in CA-G.R. CV No. 40151 with the
MODIFICATION that the award of moral damages is
reduced from ₱300,000 to ₱150,000 and the award of
attorney’s fees is deleted. Costs against petitioner.
G.R. No. L-12719             May 31, 1962
THE COLLECTOR OF INTERNAL
REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE
CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court
of Tax Appeals, reversing the decision of the
Collector of Internal Revenue, assessing against and
demanding from the "Club Filipino, Inc. de Cebu", the
sum of P12,068.84 as fixed and percentage taxes,
surcharge and compromise penalty, allegedly due
from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club
Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation organized under the laws of the
Philippines with an original authorized capital stock
of P22,000.00, which was subsequently increased to
P200,000.00, among others, to it "proporcionar,
operar, y mantener un campo de golf, tenis, gimnesio
(gymnasiums), juego de bolos (bowling alleys), mesas
de billar y pool, y toda clase de juegos no prohibidos
por leyes generales y ordenanzas generales; y
desarollar y cultivar deportes de toda clase y
denominacion cualquiera para el recreo y
entrenamiento saludable de sus miembros y
accionistas" (sec. 2, Escritura de Incorporacion del
Club Filipino, Inc. Exh. A). Neither in the articles or
by-laws is there a provision relative to dividends and
their distribution, although it is covenanted that upon
its dissolution, the Club's remaining assets, after
paying debts, shall be donated to a charitable
Philippine Institution in Cebu (Art. 27, Estatutos del
Club, Exh. A-a.).
The Club owns and operates a club house, a bowling
alley, a golf course (on a lot leased from the
government), and a bar-restaurant where it sells wines
and liquors, soft drinks, meals and short orders to its
members and their guests. The bar-restaurant was a
necessary incident to the operation of the club and its
golf-course. The club is operated mainly with funds
derived from membership fees and dues. Whatever
profits it had, were used to defray its overhead
expenses and to improve its golf-course. In 1951. as a
result of a capital surplus, arising from the re-
valuation of its real properties, the value or price of
which increased, the Club declared stock dividends;
but no actual cash dividends were distributed to the
stockholders. In 1952, a BIR agent discovered that the
Club has never paid percentage tax on the gross
receipts of its bar and restaurant, although it secured
B-4, B-9(a) and B-7 licenses. In a letter dated
December 22, 1852, the Collector of Internal Revenue
assessed against and demanded from the Club, the
following sums: —
As percentage tax on its gross
receipts
during the tax years 1946 to
1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946
70.00
to 1952
Compromise penalty 500.00
The Club wrote the Collector, requesting for the
cancellation of the assessment. The request having
been denied, the Club filed the instant petition for
review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the
payment of the sum of 12,068.84, as fixed and
percentage taxes and surcharges prescribed in sections
182, 183 and 191 of the Tax Code, under which the
assessment was made, in connection with the
operation of its bar and restaurant, during the periods
mentioned above; and
2. Whether it is liable for the payment of the sum of
P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless
otherwise provided, every person engaging in a
business on which the percentage tax is imposed shall
pay in full a fixed annual tax of ten pesos for each
calendar year or fraction thereof in which such person
shall engage in said business." Section 183 provides in
general that "the percentage taxes on business shall be
payable at the end of each calendar quarter in the
amount lawfully due on the business transacted during
each quarter; etc." And section 191, same Tax Code,
provides "Percentage tax . . . Keepers of restaurants,
refreshment parlors and other eating places shall pay a
tax three per centum, and keepers of bar and cafes
where wines or liquors are served five per centum of
their gross receipts . . .". It has been held that the
liability for fixed and percentage taxes, as provided by
these sections, does not ipso facto attach by mere
reason of the operation of a bar and restaurant. For the
liability to attach, the operator thereof must be
engaged in the business as a barkeeper and
restaurateur. The plain and ordinary meaning
of business is restricted to activities or affairs where
profit is the purpose or livelihood is the motive, and
the term business when used without qualification,
should be construed in its plain and ordinary meaning,
restricted to activities for profit or livelihood (The
Coll. of Int. Rev. v. Manila Lodge No. 761 of the
BPOE [Manila Elks Club] & Court of Tax Appeals,
G.R. No. L-11176, June 29, 1959, giving full
definitions of the word "business"; Coll. of Int. Rev.
v. Sweeney, et al. [International Club of Iloilo, Inc.],
G.R. No. L-12178, Aug. 21, 1959, the facts of which
are similar to the ones at bar; Manila Polo Club v. B.
L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to
develop and cultivate sports of all class and
denomination, for the healthful recreation and
entertainment of its stockholders and members; that
upon its dissolution, its remaining assets, after paying
debts, shall be donated to a charitable Philippine
Institution in Cebu; that it is operated mainly with
funds derived from membership fees and dues; that
the Club's bar and restaurant catered only to its
members and their guests; that there was in fact no
cash dividend distribution to its stockholders and that
whatever was derived on retail from its bar and
restaurant was used to defray its overall overhead
expenses and to improve its golf-course (cost-plus-
expenses-basis), it stands to reason that the Club is not
engaged in the business of an operator of bar and
restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the
operation of its bar and restaurant, but such fact does
not necessarily convert it into a profit-making
enterprise. The bar and restaurant are necessary
adjuncts of the Club to foster its purposes and the
profits derived therefrom are necessarily incidental to
the primary object of developing and cultivating
sports for the healthful recreation and entertainment of
the stockholders and members. That a Club makes
some profit, does not make it a profit-making Club.
As has been remarked a club should always strive,
whenever possible, to have surplus (Jesus Sacred
Heart College v. Collector of Int. Rev., G.R. No. L-
6807, May 24, 1954; Collector of Int. Rev. v. Sinco
Educational Corp., G.R. No. L-9276, Oct. 23,
1956).1äwphï1.ñët
It is claimed that unlike the two cases just cited
(supra), which are non-stock, the appellee Club is a
stock corporation. This is unmeritorious. The facts
that the capital stock of the respondent Club is divided
into shares, does not detract from the finding of the
trial court that it is not engaged in the business of
operator of bar and restaurant. What is determinative
of whether or not the Club is engaged in such business
is its object or purpose, as stated in its articles and by-
laws. It is a familiar rule that the actual purpose is not
controlled by the corporate form or by the commercial
aspect of the business prosecuted, but may be shown
by extrinsic evidence, including the by-laws and the
method of operation. From the extrinsic evidence
adduced, the Tax Court concluded that the Club is not
engaged in the business as a barkeeper and
restaurateur.
Moreover, for a stock corporation to exist, two
requisites must be complied with, to wit: (1) a capital
stock divided into shares and (2) an authority to
distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the
shares held (sec. 3, Act No. 1459). In the case at bar,
nowhere in its articles of incorporation or by-laws
could be found an authority for the distribution of its
dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock corporation,
within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be
deemed imposed upon fraternal, civic, non-profit,
nonstock organizations, unless the intent to the
contrary is manifest and patent" (Collector v. BPOE
Elks Club, et al., supra), which is not the case in the
present appeal.
Having arrived at the conclusion that respondent Club
is not engaged in the business as an operator of a bar
and restaurant, and therefore, not liable for fixed and
percentage taxes, it follows that it is not liable for any
penalty, much less of a compromise penalty.
WHEREFORE, the decision appealed from is
affirmed without costs.
G.R. No. 79182 September 11, 1991
PNOC-ENERGY DEVELOPMENT
CORPORATION, petitioner,
vs.
NATIONAL LABOR RELATIONS
COMMISSION (Third Division) and DANILO
MERCADO, respondents.
Bacorro & Associates for petitioner.
Alberto L. Dalmacion for private respondent.
PARAS, J.:
This is a petition for certiorari to set aside the
Resolution * dated July 3, 1987 of respondent National
Labor Relations Commission (NLRC for brevity)
which affirmed the decision dated April 30, 1986 of
Labor Arbiter Vito J. Minoria of the NLRC, Regional
Arbitration Branch No. VII at Cebu City in Case No.
RAB-VII-0556-85 entitled "Danilo Mercado,
Complainant, vs. Philippine National Oil Company-
Energy Development Corporation, Respondent",
ordering the reinstatement of complainant Danilo
Mercado and the award of various monetary claims.
The factual background of this case is as follows:
Private respondent Danilo Mercado was first
employed by herein petitioner Philippine National Oil
Company-Energy Development Corporation (PNOC-
EDC for brevity) on August 13, 1979. He held various
positions ranging from clerk, general clerk to shipping
clerk during his employment at its Cebu office until
his transfer to its establishment at Palimpinon,
Dumaguete, Oriental Negros on September 5, 1984.
On June 30, 1985, private respondent Mercado was
dismissed. His last salary was P1,585.00 a month
basic pay plus P800.00 living allowance (Labor
Arbiter's Decision, Annex "E" of Petition, Rollo, p.
52).
The grounds for the dismissal of Mercado are
allegedly serious acts of dishonesty committed as
follows:
1. On ApriI 12, 1985, Danilo Mercado was
ordered to purchase 1,400 pieces of nipa
shingles from Mrs. Leonardo Nodado of
Banilad, Dumaguete City, for the total
purchase price of Pl,680.00. Against company
policy, regulations and specific orders, Danilo
Mercado withdrew the nipa shingles from the
supplier but paid the amount of P1,000.00
only. Danilo Mercado appropriated the
balance of P680.00 for his personal use;
2. In the same transaction stated above, the
supplier agreed to give the company a
discount of P70.00 which Danilo Mercado did
not report to the company;
3. On March 28, 1985, Danilo Mercado was
instructed to contract the services of Fred R.
Melon of Dumaguete City, for the fabrication
of rubber stamps, for the total amount of
P28.66. Danilo Mercado paid the amount of
P20.00 to Fred R. Melon and appropriated for
his personal use the balance of P8.66.
In addition, private respondent, Danilo
Mercado violated company rules and
regulations in the following instances:
1. On June 5, 1985, Danilo Mercado was
absent from work without leave, without
proper turn-over of his work, causing
disruption and delay of company work
activities;
2. On June 15, 1985, Danilo Mercado went on
vacation leave without prior leave, against
company policy, rules and regulations.
(Petitioner's Memorandum, Rollo, p. 195).
On September 23, 1985, private respondent Mercado
filed a complaint for illegal dismissal, retirement
benefits, separation pay, unpaid wages, etc. against
petitioner PNOC-EDC before the NLRC Regional
Arbitration Branch No. VII docketed as Case No.
RAB-VII-0556-85.
After private respondent Mercado filed his position
paper on December 16, 1985 (Annex "B" of the
Petition, Rollo, pp. 28-40), petitioner PNOC-EDC
filed its Position Paper/Motion to Dismiss on January
15, 1986, praying for the dismissal of the case on the
ground that the Labor Arbiter and/or the NLRC had
no jurisdiction over the case (Annex "C" of the
Petition, Rollo, pp. 41-45), which was assailed by
private respondent Mercado in his Opposition to the
Position Paper/Motion to Dismiss dated March 12,
1986 (Annex "D" of the Petition, Rollo, pp. 46-50).
The Labor Arbiter ruled in favor of private respondent
Mercado. The dispositive onion of said decision reads
as follows:
WHEREFORE, in view of the foregoing,
respondents are hereby ordered:
1) To reinstate complainant to his former
position with full back wages from the date of
his dismissal up to the time of his actual
reinstatement without loss of seniority rights
and other privileges;
2) To pay complainant the amount of
P10,000.00 representing his personal share of
his savings account with the respondents;
3) To pay complainants the amount of
P30,000.00 moral damages; P20,000.00
exemplary damages and P5,000.00 attorney's
fees;
4) To pay complainant the amount of P792.50
as his proportionate 13th month pay for 1985.
Respondents are hereby further ordered to
deposit the aforementioned amounts with this
Office within ten days from receipt of a copy
of this decision for further disposition.
SO ORDERED.
(Labor Arbiter's Decision, Rollo, p. 56)
The appeal to the NLRC was dismissed for lack of
merit on July 3, 1987 and the assailed decision was
affirmed.
Hence, this petition.
The issues raised by petitioner in this instant petition
are:
1. Whether or not matters of employment
affecting the PNOC-EDC, a government-
owned and controlled corporation, are within
the jurisdiction of the Labor Arbiter and the
NLRC.
2. Assuming the affirmative, whether or not
the Labor Arbiter and the NLRC are justified
in ordering the reinstatement of private
respondent, payment of his savings, and
proportionate 13th month pay and payment of
damages as well as attorney's fee.
Petitioner PNOC-EDC alleges that it is a corporation
wholly owned and controlled by the government; that
the Energy Development Corporation is a subsidiary
of the Philippine National Oil Company which is a
government entity created under Presidential Decree
No. 334, as amended; that being a government-owned
and controlled corporation, it is governed by the Civil
Service Law as provided for in Section 1, Article XII-
B of the 1973 Constitution, Section 56 of Presidential
Decree No. 807 (Civil Service Decree) and Article
277 of Presidential Decree No. 442, as amended
(Labor Code).
The 1973 Constitution provides:
The Civil Service embraces every branch,
agency, subdivision and instrumentality of the
government including government-owned or
controlled corporations.
Petitioner PNOC-EDC argued that since Labor
Arbiter Minoria rendered the decision at the time
when the 1973 Constitution was in force, said
decision is null and void because under the 1973
Constitution, government-owned and controlled
corporations were governed by the Civil Service Law.
Even assuming that PNOC-EDC has no original or
special charter and Section 2(i), Article IX-B of the
1987 Constitution provides that:
The Civil Service embraces all branches,
subdivision, instrumentalities and agencies of
the Government, including government-
owned or controlled corporations with
original charters.
such circumstances cannot give validity to the
decision of the Labor Arbiter (Ibid., pp. 192-193).
This issue has already been laid to rest in the case
of PNOC-EDC vs. Leogardo, 175 SCRA 26 (July 5,
1989), involving the same petitioner and the same
issue, where this Court ruled that the doctrine that
employees of government-owned and/or con
controlled corporations, whether created by special
law or formed as subsidiaries under the General
Corporation law are governed by the Civil Service
Law and not by the Labor Code, has been supplanted
by the present Constitution. "Thus, under the present
state of the law, the test in determining whether a
government-owned or controlled corporation is
subject to the Civil Service Law are the manner of its
creation, such that government corporations created
by special charter are subject to its provisions while
those incorporated under the General Corporation
Law are not within its coverage."
Specifically, the PNOC-EDC having been
incorporated under the General Corporation Law was
held to be a government owned or controlled
corporation whose employees are subject to the
provisions of the Labor Code (Ibid.).
The fact that the case arose at the time when the 1973
Constitution was still in effect, does not deprive the
NLRC of jurisdiction on the premise that it is the 1987
Constitution that governs because it is the
Constitution in place at the time of the decision
(NASECO v. NLRC, G.R. No. 69870, 168 SCRA 122
[1988]).
In the case at bar, the decision of the NLRC was
promulgated on July 3, 1987. Accordingly, this case
falls squarely under the rulings of the aforementioned
cases.
As regards the second issue, the record shows that
PNOC-EDC's accusations of dishonesty and
violations of company rules are not supported by
evidence. Nonetheless, while acknowledging the rule
that administrative bodies are not governed by the
strict rules of evidence, petitioner PNOC-EDC alleges
that the labor arbiter's propensity to decide the case
through the position papers submitted by the parties is
violative of due process thereby rendering the
decision null and void (Ibid., p. 196).
On the other hand, private respondent contends that as
can be seen from petitioner's Motion for
Reconsideration and/or Appeal dated July 28, 1986
(Annex "F" of the Petition, Rollo, pp. 57- 64), the
latter never questioned the findings of facts of the
Labor Arbiter but simply limited its objection to the
lack of legal basis in view of its stand that the NLRC
had no jurisdiction over the case (Private
Respondent's Memorandum, Rollo, p. 104).
Petitioner PNOC-EDC filed its Position Paper/Motion
to Dismiss dated January 15, 1986 (Annex "C" of the
Petition Rollo, pp. 41-45) before the Regional
Arbitration Branch No. VII of Cebu City and its
Motion for Reconsideration and/or Appeal dated July
28, 1986 (Annex "F" of the Petition, Rollo, pp. 57-64)
before the NLRC of Cebu City. Indisputably, the
requirements of due process are satisfied when the
parties are given an opportunity to submit position
papers. What the fundamental law abhors is not the
absence of previous notice but rather the absolute lack
of opportunity to ventilate a party's side. There is no
denial of due process where the party submitted its
position paper and flied its motion for reconsideration
(Odin Security Agency vs. De la Serna, 182 SCRA
472 [February 21, 1990]). Petitioner's subsequent
Motion for Reconsideration and/or Appeal has the
effect of curing whatever irregularity might have been
committed in the proceedings below (T.H. Valderama
and Sons, Inc. vs. Drilon, 181 SCRA 308 [January 22,
1990]).
Furthermore, it has been consistently held that
findings of administrative agencies which have
acquired expertise because their jurisdiction is
confined to specific matters are accorded not only
respect but even finality (Asian Construction and
Development Corporation vs. NLRC, 187 SCRA 784
[July 27, 1990]; Lopez Sugar Corporation vs.
Federation of Free Workers, 189 SCRA 179 [August
30, 1990]). Judicial review by this Court does not go
so far as to evaluate the sufficiency of the evidence
but is limited to issues of jurisdiction or grave abuse
of discretion (Filipinas Manufacturers Bank vs.
NLRC, 182 SCRA 848 [February 28, 1990]). A
careful study of the records shows no substantive
reason to depart from these established principles.

While it is true that loss of trust or breach of

confidence is a valid ground for dismissing an
employee, such loss or breach of trust must have some
basis (Gubac v. NLRC, 187 SCRA 412 [July 13,
1990]). As found by the Labor Arbiter, the
accusations of petitioner PNOC-EDC against private
respondent Mercado have no basis. Mrs. Leonardo
Nodado, from whom the nipa shingles were
purchased, sufficiently explained in her affidavit
(Rollo, p. 36) that the total purchase price of
P1,680.00 was paid by respondent Mercado as agreed
upon. The alleged discount given by Mrs. Nodado is
not supported by evidence as well as the alleged
appropriation of P8.66 from the cost of fabrication of
rubber stamps. The Labor Arbiter, likewise, found no
evidence to support the alleged violation of company
rules. On the contrary, he found respondent Mercado's
explanation in his affidavit (Rollo, pp. 38-40) as to the
alleged violations to be satisfactory. Moreover, these
findings were never contradicted by petitioner
petitioner PNOC-EDC.

PREMISES CONSIDERED, the petition is DENIED

and the resolution of respondent NLRC dated July 3,
1987 is AFFIRMED with the modification that the
moral damages are reduced to Ten Thousand
(P10,000.00) Pesos, and the exemplary damages
reduced to Five Thousand (P5,000.00) Pesos.

SO ORDERED.
G.R. No. L-22619        December 2, 1924
NATIONAL COAL COMPANY, plaintiff-appellee,
vs.
THE COLLECTOR OF INTERNAL
REVENUE, defendant-appellant.
Attorney-General Villa-Real for appellant.
Perfecto J. Salas Rodriguez for appellee.
JOHNSON, J.:
This action was brought in the Court of First Instance
of the City of Manila on the 17th day of July, 1923,
for the purpose of recovering the sum of P12,044.68,
alleged to have been paid under protest by the plaintiff
company to the defendant, as specific tax on 24,089.3
tons of coal. Said company is a corporation created by
Act No. 2705 of the Philippine Legislature for the
purpose of developing the coal industry in the
Philippine Islands and is actually engaged in coal
mining on reserved lands belonging to the
Government. It claimed exemption from taxes under
the provision of sections 14 and 15 of Act No. 2719,
and prayed for a judgment ordering the defendant to
refund to the plaintiff said sum of P12,044.68, with
legal interest from the date of the presentation of the
complaint, and costs against the defendant.
The defendant answered denying generally and
specifically all the material allegations of the
complaint, except the legal existence and personality
of the plaintiff. As a special defense, the defendant
alleged (a) that the sum of P12,044.68 was paid by the
plaintiff without protests, and (b) that said sum was
due and owing from the plaintiff to the Government of
the Philippine Islands under the provisions of section
1496 of the Administrative Code and prayed that the
complaint be dismissed, with costs against the
plaintiff.
Upon the issue thus presented, the case was brought
on for trial. After a consideration of the evidence
adduced by both parties, the Honorable Pedro
Conception, judge, held that the words
"lands owned by any person, etc.," in section 15 of
Act No. 2719 should be understood to mean
"lands held in lease or usufruct," in harmony with the
other provision of said Act; that the coal lands
possessed by the plaintiff, belonging to the
Government, fell within the provisions of section 15
of Act No. 2719; and that a tax of P0.04 per ton of
1,016 kilos on each ton of coal extracted therefrom, as
provided in said section, was the only tax which
should be collected from the plaintiff; and sentenced
the defendant to refund to the plaintiff the sum of
P11,081.11 which is the difference between the
amount collected under section 1496 of the
Administrative Code and the amount which should
have been collected under the provisions of said
section 15 of Act No. 2719. From that sentence the
defendant appealed, and now makes the following
assignments of error:
I. The court below erred in holding that section 15 of
Act No. 2719 does not refer to coal lands owned by
persons and corporations.
II. The court below erred in holding that the plaintiff
was not subject to the tax prescribed in section 1496
of the Administrative Code.
The question confronting us in this appeal is whether
the plaintiff is subject to the taxes under section 15 of
Act No. 2719, or to the specific taxes under section
1496 of the Administrative Code.
The plaintiff corporation was created on the 10th day
of March, 1917, by Act No. 2705, for the purpose of
developing the coal industry in the Philippine Island,
in harmony with the general plan of the Government
to encourage the development of the natural resources
of the country, and to provided facilities therefor. By
said Act, the company was granted the general powers
of a corporation "and such other powers as may be
necessary to enable it to prosecute the business of
developing coal deposits in the Philippine Island and
of mining, extracting, transporting and selling the coal
contained in said deposits." (Sec. 2, Act No. 2705.)
By the same law (Act No. 2705) the Government of
the Philippine Islands is made the majority
stockholder, evidently in order to insure proper
government supervision and control, and thus to place
the Government in a position to render all possible
encouragement, assistance and help in the prosecution
and furtherance of the company's business.
On May 14, 1917, two months after the passage of
Act No. 2705, creating the National Coal Company,
the Philippine Legislature passed Act No. 2719 "to
provide for the leasing and development of coal lands
in the Philippine Islands." On October 18, 1917, upon
petition of the National Coal Company, the Governor-
General, by Proclamation No. 39, withdrew "from
settlement, entry, sale or other disposition, all coal-
bearing public lands within the Province of
Zamboanga, Department of Mindanao and Sulu, and
the Island of Polillo, Province of Tayabas." Almost
immediately after the issuance of said proclamation
the National Coal Company took possession of the
coal lands within the said reservation, with an area of
about 400 hectares, without any further formality,
contract or lease. Of the 30,000 shares of stock issued
by the company, the Government of the Philippine
Islands is the owner of 29,809 shares, that is, of 99 1/3
per centum of the whole capital stock.
If we understand the theory of the plaintiff-appellee, it
is, that it claims to be the owner of the land from
which it has mined the coal in question and is
therefore subject to the provisions of section 15 of Act
No. 2719 and not to the provisions of the section 1496
of the Administrative Code. That contention of the
plaintiff leads us to an examination of the evidence
upon the question of the ownership of the land from
which the coal in question was mined. Was the
plaintiff the owner of the land from which the coal in
question was mined? If the evidence shows the
affirmative, then the judgment should be affirmed. If
the evidence shows that the land does not belong to
the plaintiff, then the judgment should be reversed,
unless the plaintiff's rights fall under section 3 of said
Act.
The only witness presented by the plaintiff upon the
question of the ownership of the land in question was
Mr. Dalmacio Costas, who stated that he was a
member of the board of directors of the plaintiff
corporation; that the plaintiff corporation took
possession of the land in question by virtue of the
proclamation of the Governor-General, known as
Proclamation No. 39 of the year 1917; that no
document had been issued in favor of the plaintiff
corporation; that said corporation had received no
permission from the Secretary of Agriculture and
Natural Resources; that it took possession of said
lands covering an area of about 400 hectares, from
which the coal in question was mined, solely, by
virtue of said proclamation (Exhibit B, No. 39).
Said proclamation (Exhibit B) was issued by Francis
Burton Harrison, then Governor-General, on the 18th
day of October, 1917, and provided: "Pursuant to the
provision of section 71 of Act No. 926, I hereby
withdraw from settlement, entry, sale, or other
disposition, all coal-bearing public lands within the
Province of Zamboanga, Department of Mindanao
and Sulu, and the Island of Polillo, Province of
Tayabas." It will be noted that said proclamation only
provided that all coal-bearing public lands within said
province and island should be withdrawn from
settlement, entry, sale, or other disposition. There is
nothing in said proclamation which authorizes the
plaintiff or any other person to enter upon said
reversations and to mine coal, and no provision of law
has been called to our attention, by virtue of which the
plaintiff was entitled to enter upon any of the lands so
reserved by said proclamation without first obtaining
permission therefor.
The plaintiff is a private corporation. The mere fact
that the Government happens to the majority
stockholder does not make it a public corporation. Act
No. 2705, as amended by Act No. 2822, makes it
subject to all of the provisions of the Corporation
Law, in so far as they are not inconsistent with said
Act (No. 2705). No provisions of Act No. 2705 are
found to be inconsistent with the provisions of the
Corporation Law. As a private corporation, it has no
greater rights, powers or privileges than any other
corporation which might be organized for the same
purpose under the Corporation Law, and certainly it
was not the intention of the Legislature to give it a
preference or right or privilege over other legitimate
private corporations in the mining of coal. While it is
true that said proclamation No. 39 withdrew "from
settlement, entry, sale, or other disposition of coal-
bearing public lands within the Province of
Zamboanga . . . and the Island of Polillo," it made no
provision for the occupation and operation by the
plaintiff, to the exclusion of other persons or
corporations who might, under proper permission,
enter upon the operate coal mines.
On the 14th day of May, 1917, and before the
issuance of said proclamation, the Legislature of the
Philippine Island in "an Act for the leasing and
development of coal lands in the Philippine Islands"
(Act No. 2719), made liberal provision. Section 1 of
said Act provides: "Coal-bearing lands of the public
domain in the Philippine Island shall not be disposed
of in any manner except as provided in this Act,"
thereby giving a clear indication that no "coal-bearing
lands of the public domain" had been disposed of by
virtue of said proclamation.
Neither is there any provision in Act No. 2705
creating the National Coal Company, nor in the
amendments thereof found in Act No. 2822, which
authorizes the National Coal Company to enter upon
any of the reserved coal lands without first having
obtained permission from the Secretary of Agriculture
and Natural Resources.lawphi1.net
The following propositions are fully sustained by the
facts and the law:
(1) The National Coal Company is an ordinary private
corporation organized under Act No. 2705, and has no
greater powers nor privileges than the ordinary private
corporation, except those mentioned, perhaps, in
section 10 of Act No. 2719, and they do not change
the situation here.
(2) It mined on public lands between the month of
July, 1920, and the months of March, 1922, 24,089.3
tons of coal.
(3) Upon demand of the Collector of Internal Revenue
it paid a tax of P0.50 a ton, as taxes under the
provisions of article 1946 of the Administrative Code
on the 15th day of December, 1922.
(4) It is admitted that it is neither the owner nor the
lessee of the lands upon which said coal was mined.
(5) The proclamation of Francis Burton Harrison,
Governor-General, of the 18th day of October, 1917,
by authority of section 1 of Act No. 926, withdrawing
from settlement, entry, sale, or other dispositon all
coal-bearing public lands within the Province of
Zamboanga and the Island of Polillo, was not a
reservation for the benefit of the National Coal
Company, but for any person or corporation of the
Philippine Islands or of the United States.
(6) That the National Coal Company entered upon
said land and mined said coal, so far as the record
shows, without any lease or other authority from
either the Secretary of Agriculture and Natural
Resources or any person having the power to grant a
leave or authority.
From all of the foregoing facts we find that the issue
is well defined between the plaintiff and the
defendant. The plaintiff contends that it was liable
only to pay the internal revenue and other fees and
taxes provided for under section 15 of Act No. 2719;
while the defendant contends, under the facts of
record, the plaintiff is obliged to pay the internal
revenue duty provided for in section 1496 of the
Administrative Code. That being the issue, an
examination of the provisions of Act No. 2719
becomes necessary.
An examination of said Act (No. 2719) discloses the
following facts important for consideration here:
First. All "coal-bearing lands of the public domain in
the Philippine Islands shall not be disposed of in any
manner except as provided in this Act." Second.
Provisions for leasing by the Secretary of Agriculture
and Natural Resources of "unreserved, unappropriated
coal-bearing public lands," and the obligation to the
Government which shall be imposed by said Secretary
upon the lessee.lawphi1.net
Third. The internal revenue duty and tax which must
be paid upon coal-bearing lands owned by any person,
firm, association or corporation.
To repeat, it will be noted, first, that Act No. 2719
provides an internal revenue duty and tax upon
unreserved, unappropriated coal-bearing public lands
which may be leased by the Secretary of Agriculture
and Natural Resources; and, second, that said Act
(No. 2719) provides an internal revenue duty and tax
imposed upon any person, firm, association or
corporation, who may be the owner of "coal-bearing
lands." A reading of said Act clearly shows that the
tax imposed thereby is imposed upon two classes of
persons only — lessees and owners.
The lower court had some trouble in determining what
was the correct interpretation of section 15 of said
Act, by reason of what he believed to be some
difference in the interpretation of the language used in
Spanish and English. While there is some ground for
confusion in the use of the language in Spanish and
English, we are persuaded, considering all the
provisions of said Act, that said section 15 has
reference only to persons, firms, associations or
corporations which had already, prior to the existence
of said Act, become the owners of coal lands. Section
15 cannot certainty refer to "holders or lessees of coal
lands' for the reason that practically all of the other
provisions of said Act has reference to lessees or
holders. If section 15 means that the persons, firms,
associations, or corporation mentioned therein are
holders or lessees of coal lands only, it is difficult to
understand why the internal revenue duty and tax in
said section was made different from the obligations
mentioned in section 3 of said Act, imposed upon
lessees or holders.
From all of the foregoing, it seems to be made plain
that the plaintiff is neither a lessee nor an owner of
coal-bearing lands, and is, therefore, not subject to
any other provisions of Act No. 2719. But, is the
plaintiff subject to the provisions of section 1496 of
the Administrative Code?
Section 1496 of the Administrative Code provides that
"on all coal and coke there shall be collected, per
metric ton, fifty centavos." Said section (1496) is a
part of article, 6 which provides for specific taxes.
Said article provides for a specific internal revenue tax
upon all things manufactured or produced in the
Philippine Islands for domestic sale or consumption,
and upon things imported from the United States or
foreign countries. It having been demonstrated that the
plaintiff has produced coal in the Philippine Islands
and is not a lessee or owner of the land from which
the coal was produced, we are clearly of the opinion,
and so hold, that it is subject to pay the internal
revenue tax under the provisions of section 1496 of
the Administrative Code, and is not subject to the
payment of the internal revenue tax under section 15
of Act No. 2719, nor to any other provisions of said
Act.
Therefore, the judgment appealed from is hereby
revoked, and the defendant is hereby relieved from all
responsibility under the complaint. And, without any
finding as to costs, it is so ordered.
G.R. No. 41570           September 6, 1934
RED LINE TRANSPORTATION CO., petitioner-
appellant,
vs.
RURAL TRANSIT CO., LTD., respondent-appellee.
L. D. Lockwood for appellant.
Ohnick and Opisso for appellee.
BUTTE, J.:
This case is before us on a petition for review of an
order of the Public Service Commission entered
December 21, 1932, granting to the Rural Transit
Company, Ltd., a certificate of public convenience to
operate a transportation service between Ilagan in the
Province of Isabela and Tuguegarao in the Province of
Cagayan, and additional trips in its existing express
service between Manila Tuguegarao.
On June 4, 1932, the Rural Transit Company, Ltd., a
Philippine corporation, filed with the Public Company
Service Commission an application in which it is
stated in substance that it is the holder of a certificate
or public convenience to operate a passenger bus
service between Manila and Tuguegarao; that it is the
only operator of direct service between said points and
the present authorized schedule of only one trip daily
is not sufficient; that it will be also to the public
convenience to grant the applicant a certificate for a
new service between Tuguegarao and Ilagan.
On July 22, 1932, the appellant, Red Line
Transportation Company, filed an opposition to the
said application alleging in substance that as to the
service between Tuguegarao and Ilagan, the oppositor
already holds a certificate of public convenience and
is rendering adequate and satisfactory service; that the
granting of the application of the Rural Transit
Company, Ltd., would not serve public convenience
but would constitute a ruinous competition for the
oppositor over said route.
After testimony was taken, the commission, on
December 21, 1932, approved the application of the
Rural Transit Company, Ltd., and ordered that the
certificate of public convenience applied for be
"issued to the applicant Rural Transit Company, Ltd.,"
with the condition, among others, that "all the other
terms and conditions of the various certificates of
public convenience of the herein applicant and herein
incorporated are made a part hereof."
On January 14, 1933, the oppositor Red Line
Transportation Company filed a motion for rehearing
and reconsideration in which it called the
commission's attention to the fact that there was
pending in the Court of First Instance of Manila case
N. 42343, an application for the voluntary dissolution
of the corporation, Rural Transit Company, Ltd. Said
motion for reconsideration was set down for hearing
on March 24, 1933. On March 23, 1933, the Rural
Transit Company, Ltd., the applicant, filed a motion
for postponement. This motion was verified by M.
Olsen who swears "that he was the secretary of the
Rural Transit Company, Ltd., in the above entitled
case." Upon the hearing of the motion for
reconsideration, the commission admitted without
objection the following documents filed in said case
No. 42343 in the Court of First Instance of Manila for
the dissolution of the Rural Transit Company, Ltd. the
petition for dissolution dated July 6, 1932, the
decision of the said Court of First Instance of Manila,
dated February 28, 1933, decreeing the dissolution of
the Rural Transit Company, Ltd.
At the trial of this case before the Public Service
Commission an issue was raised as to who was the
real party in interest making the application, whether
the Rural Transit Company, Ltd., as appeared on the
face of the application, or the Bachrach Motor
Company, Inc., using name of the Rural Transit
Company, Ltd., as a trade name. The evidence given
by the applicant's secretary, Olsen, is certainly very
dubious and confusing, as may be seen from the
following:
Q.            Will you please answer the question
whether it is the Bachrach Motor Company
operating under the trade name of the Rural
Transit Company, Limited, or whether it is
the Rural Transit Company, Limited in its
own name this application was filed?
A.            The Bachrach Motor Company is
the principal stockholder.
Q.            Please answer the question.
ESPELETA.  Objecion porque la pregunta ya
ha sido contestada.
JUEZ.  Puede contestar.
A.            I do not know what the legal
construction or relationship existing between
the two.
JUDGE.  I do not know what is in your mind
by not telling the real applicant in this case?
A.            It is the Rural Transit Company,
Ltd.
JUDGE.  As an entity by itself and not by the
Bachrach Motor Company?
A.            I do not know. I have not given that
phase of the matter much thought, as in
previous occassion had not necessitated.
JUDGE.  In filing this application, you filed it
for the operator on that line? Is it not!
A.            Yes, sir.
JUDGE.  Who is that operator?
A.            The Rural Transit Company, Ltd.
JUDGE.  By itself, or as a commercial name
of the Bachrach Motor Company?
A.            I cannot say.
ESPELETA.  The Rural Transit Company,
Ltd., is a corporation duly established in
accordance with the laws of the Philippine
Islands.
JUDGE.  According to the records of this
commission the Bachrach Motor Company is
the owner of the certificates and the Rural
Transit Company, Ltd., is operating without
any certificate.
JUDGE.  If you filed this application for the
Rural Transit Company, Ltd., and afterwards
it is found out that the Rural Transit
Company, Ltd., is not an operator, everything
will be turned down.
JUDGE.  My question was, when you filed
this application you evidently made it for the
operator?
A.            Yes, sir.
JUDGE.  Who was that operator you had in
mind?
A.            According to the status of the
ownership of the certificates of the former
Rural Transit Company, the operator was the
operator authorized in case No. 23217 to
whom all of the assets of the former Rural
Transit Company were sold.
JUDGE.  Bachrach Motor Company?
A.            All actions have been prosecuted in
the name of the Rural Transit Company, Ltd.
JUDGE.  You mean the Bachrach Motor
Company, Inc., doing business under the
name of the Rural Transit Company, Ltd.?
A.            Yes, sir.
LOCKWOOD.  I move that this case be
dismissed, your Honor, on the ground that this
application was made in the name of one
party but the real owner is another party.
ESPELETA.  We object to that petition.
JUDGE.  I will have that in mind when I
decide the case. If I agree with you everything
would be finished.
The Bachrach Motor Company, Inc., entered no
appearance and ostensibly took no part in the hearing
of the application of the Rural Transit Company, Ltd.
It may be a matter of some surprise that the
commission did not on its own motion order the
amendment of the application by substituting the
Bachrach Motor Company, Inc., as the applicant.
However, the hearing proceeded on the application as
filed and the decision of December 2, 1932, was
rendered in favor of the Rural Transit Company, Ltd.,
and the certificate ordered to be issued in its name, in
the face of the evidence that the said corporation was
not the real party in interest. In its said decision, the
commission undertook to meet the objection by
referring to its resolution of November 26, 1932,
entered in another case. This resolution in case No.
23217 concludes as follows:
Premises considered we hereby authorize the
Bachrach Motor Co., Inc., to continue using
the name of "Rural Transit Co., Ltd.," as its
trade name in all the applications, motions or
other petitions to be filed in this commission
in connection with said business and that this
authority is given retroactive effect as of the
date, of filing of the application in this case,
to wit, April 29, 1930.
We know of no law that empowers the Public Service
Commission or any court in this jurisdiction to
authorize one corporation to assume the name of
another corporation as a trade name. Both the Rural
Transit Company, Ltd., and the Bachrach Motor Co.,
Inc., are Philippine corporations and the very law of
their creation and continued existence requires each to
adopt and certify a distinctive name. The
incorporators "constitute a body politic and
corporate under the name stated in the certificate."
(Section 11, Act No. 1459, as amended.) A
corporation has the power "of succession by its
corporate name." (Section 13, ibid.) The name of a
corporation is therefore essential to its existence. It
cannot change its name except in the manner provided
by the statute. By that name alone is it authorized to
transact business. The law gives a corporation no
express or implied authority to assume another name
that is unappropriated: still less that of another
corporation, which is expressly set apart for it and
protected by the law. If any corporation could assume
at pleasure as an unregistered trade name the name of
another corporation, this practice would result in
confusion and open the door to frauds and evasions
and difficulties of administration and supervision. The
policy of the law expressed in our corporation statute
and the Code of Commerce is clearly against such a
practice. (Cf. Scarsdale Pub. Co. Colonial Press vs.
Carter, 116 New York Supplement, 731; Svenska Nat.
F. i. C. vs. Swedish Nat. Assn., 205 Illinois [Appellate
Courts], 428, 434.)
The order of the commission of November 26, 1932,
authorizing the Bachrach Motor Co., Incorporated, to G.R. No. L-28351 July 28, 1977
assume the name of the Rural Transit Co., Ltd.
likewise in corporated, as its trade name being void, UNIVERSAL MILLS CORPORATION, petitioner,
and accepting the order of December 21, 1932, at its vs.
face as granting a certificate of public convenience to UNIVERSAL TEXTILE MILLS, INC., respondent.
the applicant Rural Transit Co., Ltd., the said order
last mentioned is set aside and vacated on the ground Emigdio G. Tanjuatco for petitioner.
that the Rural Transit Company, Ltd., is not the real
party in interest and its application was fictitious. Picazo, Santayana, Reyes, Tayao & Alfonso for
respondent.
In view of the dissolution of the Rural Transit
Company, Ltd. by judicial decree of February 28,
1933, we do not see how we can assess costs against
said respondent, Rural Transit Company, Ltd.
BARREDO, J.:

Appeal from the order of the Securities and Exchange

Commission in S.E.C. Case No. 1079, entitled In the
Matter of the Universal Textile Mills, Inc. vs.
Universal Mills Corporation, a petition to have
appellant change its corporate name on the ground
that such name is "confusingly and deceptively
similar" to that of appellee, which petition the
Commission granted.

According to the order, "the Universal Textile Mills,

Inc. was organ on December 29, 1953, as a textile
manufacturing firm for which it was issued a
certificate of registration on January 8, 1954. The
Universal Mills Corporation, on the other hand, was
registered in this Commission on October 27, 1954,
under its original name, Universal Hosiery Mills
Corporation, having as its primary purpose the
"manufacture and production of hosieries and wearing
apparel of all kinds." On May 24, 1963, it filed an
amendment to its articles of incorporation changing its
name to Universal Mills Corporation, its present
name, for which this Commission issued the
certificate of approval on June 10, 1963.

The immediate cause of this present complaint,

however, was the occurrence of a fire which gutted
respondent's spinning mills in Pasig, Rizal. Petitioner
alleged that as a result of this fire and because of the
similarity of respondent's name to that of herein
complainant, the news items appearing in the various
metropolitan newspapers carrying reports on the fire
created uncertainty and confusion among its bankers,
friends, stockholders and customers prompting
petitioner to make announcements, clarifying the real
Identity of the corporation whose property was
burned. Petitioner presented documentary and
testimonial evidence in support of this allegation.

On the other hand, respondent's

position is that the names of the two
corporations are not similar and even
if there be some similarity, it is not
confusing or deceptive; that the only
reason that respondent changed its
name was because it expanded its
business to include the manufacture
 of fabrics of all kinds; and that the
word 'textile' in petitioner's name is
dominant and prominent enough to
distinguish the two. It further argues
that petitioner failed to present
evidence of confusion or deception in
the ordinary course of business; that
the only supposed confusion proved
by complainant arose out of an
extraordinary occurrence — a
disastrous fire. (pp. 16-&17, Record.)
Upon these premises, the Commission held:
From the facts proved and the
jurisprudence on the matter, it appears
necessary under the circumstances to
enjoin the respondent Universal Mills
Corporation from further using its
present corporate name. Judging from
what has already happened, confusion
is not only apparent, but possible. It
does not matter that the instance of
confusion between the two corporate
names was occasioned only by a fire
or an extraordinary occurrence. It is
precisely the duty of this Commission
to prevent such confusion at all times
and under all circumstances not only
for the purpose of protecting the
corporations involved but more so for
the protection of the public.
In today's modern business life where
people go by tradenames and
corporate images, the corporate name
becomes the more important. This
Commission cannot close its eyes to
the fact that usually it is the sound of
all the other words composing the
names of business corporations that
sticks to the mind of those who deal
with them. The word "textile" in
Universal Textile Mills, Inc.' can not
possibly assure the exclusion of all
other entities with similar names from
the mind of the public especially so, if
the business they are engaged in are
the same, like in the instant case.
This Commission further takes
cognizance of the fact that when
respondent filed the amendment
changing its name to Universal Mills
Corporation, it correspondingly filed
a written undertaking dated June 5,
1963 and signed by its President, Mr.
Mariano Cokiat, promising to change
its name in the event that there is
another person, firm or entity who has
obtained a prior right to the use of
such name or one similar to it. That
promise is still binding upon the
corporation and its responsible
officers. (pp. 17-18, Record.)
It is obvious that the matter at issue is within the
competence of the Securities and Exchange
Commission to resolve in the first instance in the
exercise of the jurisdiction it used to possess under
Commonwealth Act 287 as amended by Republic Act
1055 to administer the application and enforcement of
all laws affecting domestic corporations and
associations, reserving to the courts only conflicts of
judicial nature, and, of course, the Supreme Court's
authority to review the Commissions actuations in
appropriate instances involving possible denial of due
process and grave abuse of discretion. Thus, in the
case at bar, there being no claim of denial of any
constitutional right, all that We are called upon to
determine is whether or not the order of the
Commission enjoining petitioner to its corporate name
constitutes, in the light of the circumstances found by
the Commission, a grave abuse of discretion.
We believe it is not. Indeed, it cannot be said that the
impugned order is arbitrary and capricious. Clearly, it
has rational basis. The corporate names in question
are not Identical, but they are indisputably so similar
that even under the test of "reasonable care and
observation as the public generally are capable of
using and may be expected to exercise" invoked by
appellant, We are apprehensive confusion will usually
arise, considering that under the second amendment of
its articles of incorporation on August 14, 1964,
appellant included among its primary purposes the
"manufacturing, dyeing, finishing and selling of
fabrics of all kinds" in which respondent had been
engaged for more than a decade ahead of petitioner.
Factually, the Commission found existence of such
confusion, and there is evidence to support its
conclusion. Since respondent is not claiming damages
in this proceeding, it is, of course, immaterial whether
or not appellant has acted in good faith, but We
cannot perceive why of all names, it had to choose a
name already being used by another firm engaged in
practically the same business for more than a decade
enjoying well earned patronage and goodwill, when
there are so many other appropriate names it could
possibly adopt without arousing any suspicion as to its
motive and, more importantly, any degree of
confusion in the mind of the public which could
mislead even its own customers, existing or
prospective. Premises considered, there is no warrant
for our interference.
As this is purely a case of injunction, and considering
the time that has elapsed since the facts complained of
took place, this decision should not be deemed as
foreclosing any further remedy which appellee may
have for the protection of its interests.
WHEREFORE, with the reservation already
mentioned, the appealed decision is affirmed. Costs
against petitioners.
Fernando (Chairman), Antonio, Aquino, Concepcion
Jr. and Santos, JJ., concur. G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC.,

petitioner, vs. COURT OF APPEALS, LYCEUM
OF APARRI, LYCEUM OF CABAGAN,
LYCEUM OF CAMALANIUGAN, INC.,
LYCEUM OF LALLO, INC., LYCEUM OF
TUAO, INC., BUHI LYCEUM, CENTRAL
LYCEUM OF CATANDUANES, LYCEUM OF
SOUTHERN PHILIPPINES, LYCEUM OF
EASTERN MINDANAO, INC. and WESTERN
PANGASINAN LYCEUM, INC., respondents.

Quisumbing, Torres & Evangelista Law Offices

and Ambrosio Padilla for petitioner.

Antonio M. Nuyles and Purungan, Chato, Chato,

Tarriela & Tan Law Offices for respondents.

Froilan Siobal for Western Pangasinan Lyceum.

SYLLABUS

1. CORPORATION LAW; CORPORATE NAMES;

REGISTRATION OF PROPOSED NAME WHICH
IS IDENTICAL OR CONFUSINGLY SIMILAR TO
THAT OF ANY EXISTING CORPORATION,
PROHIBITED; CONFUSION AND DECEPTION
EFFECTIVELY PRECLUDED BY THE
APPENDING OF GEOGRAPHIC NAMES TO THE
WORD "LYCEUM". — The Articles of Incorporation
of a corporation must, among other things, set out the
name of the corporation. Section 18 of the
Corporation Code establishes a restrictive rule insofar
as corporate names are concerned: "Section 18.
Corporate name. — No corporate name may be
allowed by the Securities an Exchange Commission if
the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation
or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing
laws. When a change in the corporate name is
approved, the Commission shall issue an amended
certificate of incorporation under the amended name."
The policy underlying the prohibition in Section 18
against the registration of a corporate name which is
"identical or deceptively or confusingly similar" to
that of any existing corporation or which is "patently
deceptive" or "patently confusing" or "contrary to
existing laws," is the avoidance of fraud upon the
public which would have occasion to deal with the
entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of
administration and supervision over corporations. We
do not consider that the corporate names of private
respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the
petitioner institution. True enough, the corporate
names of private respondent entities all carry the word
"Lyceum" but confusion and deception are effectively
precluded by the appending of geographic names to
the word "Lyceum." Thus, we do not believe that the
"Lyceum of Aparri" can be mistaken by the general
public for the Lyceum of the Philippines, or that the
"Lyceum of Camalaniugan" would be confused with
the Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY
MEANING; USE OF WORD "LYCEUM," NOT
ATTENDED WITH EXCLUSIVITY. — It is
claimed, however, by petitioner that the word
"Lyceum" has acquired a secondary meaning in
relation to petitioner with the result that word,
although originally a generic, has become
appropriable by petitioner to the exclusion of other
institutions like private respondents herein. The
doctrine of secondary meaning originated in the field
of trademark law. Its application has, however, been
extended to corporate names sine the right to use a
corporate name to the exclusion of others is based
upon the same principle which underlies the right to
use a particular trademark or tradename. In Philippine
Nut Industry, Inc. v. Standard Brands, Inc., the
doctrine of secondary meaning was elaborated in the
following terms: " . . . a word or phrase originally
incapable of exclusive appropriation with reference to
an article on the market, because geographically or
otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase
has come to mean that the article was his product."
The question which arises, therefore, is whether or not
the use by petitioner of "Lyceum" in its corporate
name has been for such length of time and with such
exclusivity as to have become associated or identified
with the petitioner institution in the mind of the
general public (or at least that portion of the general
public which has to do with schools). The Court of
Appeals recognized this issue and answered it in the
negative: "Under the doctrine of secondary meaning, a
word or phrase originally incapable of exclusive
appropriation with reference to an article in the
market, because geographical or otherwise descriptive
might nevertheless have been used so long and so
exclusively by one producer with reference to this
article that, in that trade and to that group of the
purchasing public, the word or phrase has come to
mean that the article was his produce (Ana Ang vs.
Toribio Teodoro, 74 Phil. 56). This circumstance has
been referred to as the distinctiveness into which the
name or phrase has evolved through the substantial
and exclusive use of the same for a considerable
period of time. . . . No evidence was ever presented in
the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there
was any of this kind, the same tend to prove only that
the appellant had been using the disputed word for a
long period of time. . . . In other words, while the
appellant may have proved that it had been using the
word 'Lyceum' for a long period of time, this fact
alone did not amount to mean that the said word had
acquired secondary meaning in its favor because the
appellant failed to prove that it had been using the
same word all by itself to the exclusion of others.
More so, there was no evidence presented to prove
that confusion will surely arise if the same word were
to be used by other educational institutions.
Consequently, the allegations of the appellant in its
first two assigned errors must necessarily fail." We
agree with the Court of Appeals. The number alone of
the private respondents in the case at bar suggests
strongly that petitioner's use of the word "Lyceum"
has not been attended with the exclusivity essential for
applicability of the doctrine of secondary meaning.
Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western
Pangasinan Lyceum and a little later with other
private respondent institutions which registered with
the SEC using "Lyceum" as part of their corporation
names. There may well be other schools using
Lyceum or Liceo in their names, but not registered
with the SEC because they have not adopted the
corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR
ENTIRETY TO DETERMINE WHETHER THEY
ARE CONFUSINGLY OR DECEPTIVELY
SIMILAR TO ANOTHER CORPORATE ENTITY'S
NAME. — petitioner institution is not entitled to a
legally enforceable exclusive right to use the word
"Lyceum" in its corporate name and that other
institutions may use "Lyceum" as part of their
corporate names. To determine whether a given
corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate
name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when
the name of petitioner is juxtaposed with the names of
private respondents, they are not reasonably regarded
as "identical" or "confusingly or deceptively similar"
with each other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered
with the Securities and Exchange Commission
("SEC"). When it first registered with the SEC on 21
September 1950, it used the corporate name Lyceum
of the Philippines, Inc. and has used that name ever
since.
On 24 February 1984, petitioner instituted
proceedings before the SEC to compel the private
respondents, which are also educational institutions, to
delete the word "Lyceum" from their corporate names
and permanently to enjoin them from using "Lyceum"
as part of their respective names.
Some of the private respondents actively participated
in the proceedings before the SEC. These are the
following, the dates of their original SEC registration
being set out below opposite their respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The following private respondents were declared in
default for failure to file an answer despite service of
summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had
included three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as
concerned the Lyceum of Malacanay and the Lyceum
of Marbel, for failure to serve summons upon these
two (2) entities. The case against the Liceum of
Araullo was dismissed when that school motu proprio
change its corporate name to "Pamantasan ng
Araullo."
The background of the case at bar needs some
recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No.
1241) against the Lyceum of Baguio, Inc. to require it
to change its corporate name and to adopt another
name not "similar [to] or identical" with that of
petitioner. In an Order dated 20 April 1977, Associate
Commissioner Julio Sulit held that the corporate name
of petitioner and that of the Lyceum of Baguio, Inc.
were substantially identical because of the presence of
a "dominant" word, i.e., "Lyceum," the name of the
geographical location of the campus being the only
word which distinguished one from the other
corporate name. The SEC also noted that petitioner
had registered as a corporation ahead of the Lyceum
of Baguio, Inc. in point of time, 1 and ordered the
latter to change its name to another name "not similar
or identical [with]" the names of previously registered
entities.
The Lyceum of Baguio, Inc. assailed the Order of the
SEC before the Supreme Court in a case docketed as
G.R. No. L-46595. In a Minute Resolution dated 14
September 1977, the Court denied the Petition for
Review for lack of merit. Entry of judgment in that
case was made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No.
L-46595, petitioner then wrote all the educational
institutions it could find using the word "Lyceum" as
part of their corporate name, and advised them to
discontinue such use of "Lyceum." When, with the
passage of time, it became clear that this recourse had
failed, petitioner instituted before the SEC SEC-Case
No. 2579 to enforce what petitioner claims as its
proprietary right to the word "Lyceum." The SEC
hearing officer rendered a decision sustaining
petitioner's claim to an exclusive right to use the word
"Lyceum." The hearing officer relied upon the SEC
ruling in the Lyceum of Baguio, Inc. case (SEC-Case
No. 1241) and held that the word "Lyceum" was
capable of appropriation and that petitioner had
acquired an enforceable exclusive right to the use of
that word.
On appeal, however, by private respondents to the
SEC En Banc, the decision of the hearing officer was
reversed and set aside. The SEC En Banc did not
consider the word "Lyceum" to have become so
identified with petitioner as to render use thereof by
other institutions as productive of confusion about the
identity of the schools concerned in the mind of the
general public. Unlike its hearing officer, the SEC En
Banc held that the attaching of geographical names to
the word "Lyceum" served sufficiently to distinguish
the schools from one another, especially in view of the
fact that the campuses of petitioner and those of the
private respondents were physically quite remote from
each other. 3
Petitioner then went on appeal to the Court of
Appeals. In its Decision dated 28 June 1991, however,
the Court of Appeals affirmed the questioned Orders
of the SEC En Banc. 4 Petitioner filed a motion for
reconsideration, without success.
Before this Court, petitioner asserts that the Court of
Appeals committed the following errors:
1. The Court of Appeals erred in holding that the
Resolution of the Supreme Court in G.R. No. L-46595
did not constitute stare decisis as to apply to this case
and in not holding that said Resolution bound
subsequent determinations on the right to exclusive
use of the word Lyceum.
2. The Court of Appeals erred in holding that
respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word
Lyceum has not acquired a secondary meaning in
favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum
as a generic word cannot be appropriated by the
petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors,
though not necessarily seriatim. We begin by noting
that the Resolution of the Court in G.R. No. L-46595
does not, of course, constitute res adjudicata in respect
of the case at bar, since there is no identity of parties.
Neither is stare decisis pertinent, if only because the
SEC En Banc itself has re-examined Associate
Commissioner Sulit's ruling in the Lyceum of Baguio
case. The Minute Resolution of the Court in G.R. No.
L-46595 was not a reasoned adoption of the Sulit
ruling.
The Articles of Incorporation of a corporation must,
among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate
names are concerned:
"SECTION 18. Corporate name. — No corporate
name may be allowed by the Securities an Exchange
Commission if the proposed name is identical or
deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the
corporate name is approved, the Commission shall
issue an amended certificate of incorporation under
the amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18
against the registration of a corporate name which is
"identical or deceptively or confusingly similar" to
that of any existing corporation or which is "patently
deceptive" or "patently confusing" or "contrary to
existing laws," is the avoidance of fraud upon the
public which would have occasion to deal with the
entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of
administration and supervision over corporations. 7
We do not consider that the corporate names of
private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the
petitioner institution. True enough, the corporate
names of private respondent entities all carry the word
"Lyceum" but confusion and deception are effectively
precluded by the appending of geographic names to
the word "Lyceum." Thus, we do not believe that the
"Lyceum of Aparri" can be mistaken by the general
public for the Lyceum of the Philippines, or that the
"Lyceum of Camalaniugan" would be confused with
the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word
for the Greek lykeion which in turn referred to a
locality on the river Ilissius in ancient Athens
"comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by
Pisistratus, Pericles and Lycurgus frequented by the
youth for exercise and by the philosopher Aristotle
and his followers for teaching." 8 In time, the word
"Lyceum" became associated with schools and other
institutions providing public lectures and concerts and
public discussions. Thus today, the word "Lyceum"
generally refers to a school or an institution of
learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is
also found in Spanish (liceo) and in French (lycee). As
the Court of Appeals noted in its Decision, Roman
Catholic schools frequently use the term; e.g., "Liceo
de Manila," "Liceo de Baleno" (in Baleno, Masbate),
"Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is
in fact as generic in character as the word
"university." In the name of the petitioner, "Lyceum"
appears to be a substitute for "university;" in other
places, however, "Lyceum," or "Liceo" or "Lycee"
frequently denotes a secondary school or a college. It
may be (though this is a question of fact which we
need not resolve) that the use of the word "Lyceum"
may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable
number of educational institutions have adopted
"Lyceum" or "Liceo" as part of their corporate names.
Since "Lyceum" or "Liceo" denotes a school or
institution of learning, it is not unnatural to use this
word to designate an entity which is organized and
operating as an educational institution.
It is claimed, however, by petitioner that the word
"Lyceum" has acquired a secondary meaning in
relation to petitioner with the result that that word,
although originally a generic, has become
appropriable by petitioner to the exclusion of other
institutions like private respondents herein.
The doctrine of secondary meaning originated in the
field of trademark law. Its application has, however,
been extended to corporate names sine the right to use
a corporate name to the exclusion of others is based
upon the same principle which underlies the right to
use a particular trademark or tradename. 10 In
Philippine Nut Industry, Inc. v. Standard Brands, Inc.,
11 the doctrine of secondary meaning was elaborated
in the following terms:
" . . . a word or phrase originally incapable of
exclusive appropriation with reference to an article on
the market, because geographically or otherwise
descriptive, might nevertheless have been used so
long and so exclusively by one producer with
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase
has come to mean that the article was his product." 12
The question which arises, therefore, is whether or not
the use by petitioner of "Lyceum" in its corporate
name has been for such length of time and with such
exclusivity as to have become associated or identified
with the petitioner institution in the mind of the
general public (or at least that portion of the general
public which has to do with schools). The Court of
Appeals recognized this issue and answered it in the
negative:
"Under the doctrine of secondary meaning, a word or
phrase originally incapable of exclusive appropriation
with reference to an article in the market, because
geographical or otherwise descriptive might
nevertheless have been used so long and so
exclusively by one producer with reference to this
article that, in that trade and to that group of the
purchasing public, the word or phrase has come to
mean that the article was his produce (Ana Ang vs.
Toribio Teodoro, 74 Phil. 56). This circumstance has
been referred to as the distinctiveness into which the
name or phrase has evolved through the substantial
and exclusive use of the same for a considerable
period of time. Consequently, the same doctrine or
principle cannot be made to apply where the evidence
did not prove that the business (of the plaintiff) has
continued for so long a time that it has become of
consequence and acquired a good will of considerable
value such that its articles and produce have acquired
a well-known reputation, and confusion will result by
the use of the disputed name (by the defendant) (Ang
Si Heng vs. Wellington Department Store, Inc., 92
Phil. 448).
With the foregoing as a yardstick, [we] believe the
appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the
hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there
was any of this kind, the same tend to prove only that
the appellant had been using the disputed word for a
long period of time. Nevertheless, its (appellant)
exclusive use of the word (Lyceum) was never
established or proven as in fact the evidence tend to
convey that the cross-claimant was already using the
word 'Lyceum' seventeen (17) years prior to the date
the appellant started using the same word in its
corporate name. Furthermore, educational institutions
of the Roman Catholic Church had been using the
same or similar word like 'Liceo de Manila,' 'Liceo de
Baleno' (in Baleno, Masbate), 'Liceo de Masbate,'
'Liceo de Albay' long before appellant started using
the word 'Lyceum'. The appellant also failed to prove
that the word 'Lyceum' has become so identified with
its educational institution that confusion will surely
arise in the minds of the public if the same word were
to be used by other educational institutions.
In other words, while the appellant may have proved
that it had been using the word 'Lyceum' for a long
period of time, this fact alone did not amount to mean
that the said word had acquired secondary meaning in
its favor because the appellant failed to prove that it
had been using the same word all by itself to the
exclusion of others. More so, there was no evidence
presented to prove that confusion will surely arise if
the same word were to be used by other educational
institutions. Consequently, the allegations of the
appellant in its first two assigned errors must
necessarily fail." 13 (Underscoring partly in the
original and partly supplied)
We agree with the Court of Appeals. The number
alone of the private respondents in the case at bar
suggests strongly that petitioner's use of the word
"Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary
meaning. It may be noted also that at least one of the
private respondents, i.e., the Western Pangasinan
Lyceum, Inc., used the term "Lyceum" seventeen (17)
years before the petitioner registered its own corporate
name with the SEC and began using the word
"Lyceum." It follows that if any institution had
acquired an exclusive right to the word "Lyceum,"
that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner
institution.
In this connection, petitioner argues that because the
Western Pangasinan Lyceum, Inc. failed to
reconstruct its records before the SEC in accordance
with the provisions of R.A. No. 62, which records had
been destroyed during World War II, Western
Pangasinan Lyceum should be deemed to have lost all
rights it may have acquired by virtue of its past
registration. It might be noted that the Western
Pangasinan Lyceum, Inc. registered with the SEC
soon after petitioner had filed its own registration on
21 September 1950. Whether or not Western
Pangasinan Lyceum, Inc. must be deemed to have lost
its rights under its original 1933 registration, appears
to us to be quite secondary in importance; we refer to
this earlier registration simply to underscore the fact
that petitioner's use of the word "Lyceum" was neither
the first use of that term in the Philippines nor an
exclusive use thereof. Petitioner's use of the word
"Lyceum" was not exclusive but was in truth shared
with the Western Pangasinan Lyceum and a little later
with other private respondent institutions which
registered with the SEC using "Lyceum" as part of
their corporation names. There may well be other
schools using Lyceum or Liceo in their names, but not
registered with the SEC because they have not
adopted the corporate form of organization.
We conclude and so hold that petitioner institution is
not entitled to a legally enforceable exclusive right to
use the word "Lyceum" in its corporate name and that
other institutions may use "Lyceum" as part of their
corporate names. To determine whether a given
corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate
name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when
the name of petitioner is juxtaposed with the names of
private respondents, they are not reasonably regarded
as "identical" or "confusingly or deceptively similar"
with each other.
WHEREFORE, the petitioner having failed to show
any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review
is DENIED for lack of merit, and the Decision of the
Court of Appeals dated 28 June 1991 is hereby
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-22238             February 18, 1967
CLAVECILLIA RADIO SYSTEM, petitioner-
appellant,
vs.
HON. AGUSTIN ANTILLON, as City Judge of the
Municipal Court of Cagayan de Oro City
and NEW CAGAYAN GROCERY, respondents-
appellees.
B. C. Padua for petitioner and appellant.
Pablo S. Reyes for respondents and appellees.
REGALA, J.:
This is an appeal from an order of the Court of First
Instance of Misamis Oriental dismissing the petition
of the Clavecilla Radio System to prohibit the City
Judge of Cagayan de Oro from taking cognizance of
Civil Case No. 1048 for damages.
It appears that on June 22, 1963, the New Cagayan
Grocery filed a complaint against the Clavecilla Radio
System alleging, in effect, that on March 12, 1963, the
following message, addressed to the former, was filed
at the latter's Bacolod Branch Office for transmittal
thru its branch office at Cagayan de Oro:
NECAGRO CAGAYAN DE ORO
(CLAVECILLA)
REURTEL WASHED NOT AVAILABLE
REFINED TWENTY FIFTY IF
AGREEABLE SHALL SHIP LATER
REPLY POHANG
The Cagayan de Oro branch office having
received the said message omitted, in
delivering the same to the New Cagayan
Grocery, the word "NOT" between the words
"WASHED" and "AVAILABLE," thus
changing entirely the contents and purport of
the same and causing the said addressee to
suffer damages. After service of summons,
the Clavecilla Radio System filed a motion to
dismiss the complaint on the grounds that it
states no cause of action and that the venue is
improperly laid. The New Cagayan Grocery
interposed an opposition to which the
Clavecilla Radio System filed its rejoinder.
Thereafter, the City Judge, on September 18,
1963, denied the motion to dismiss for lack of
merit and set the case for hearing.1äwphï1.ñët
Hence, the Clavecilla Radio System filed a petition
for prohibition with preliminary injunction with the
Court of First Instance praying that the City Judge,
Honorable Agustin Antillon, be enjoined from further
proceeding with the case on the ground of improper
venue. The respondents filed a motion to dismiss the
petition but this was opposed by the petitioner. Later,
the motion was submitted for resolution on the The order appealed from is therefore reversed, but
pleadings. without prejudice to the filing of the action in Which
the venue shall be laid properly. With costs against the
In dismissing the case, the lower court held that the respondents-appellees.
Clavecilla Radio System may be sued either in Manila
where it has its principal office or in Cagayan de Oro
City where it may be served, as in fact it was served,
with summons through the Manager of its branch
office in said city. In other words, the court upheld the
authority of the city court to take cognizance of the
case.1äwphï1.ñët

In appealing, the Clavecilla Radio System contends

that the suit against it should be filed in Manila where
it holds its principal office.

It is clear that the case for damages filed with the city
court is based upon tort and not upon a written
contract. Section 1 of Rule 4 of the New Rules of
Court, governing venue of actions in inferior courts,
provides in its paragraph (b) (3) that when "the action
is not upon a written contract, then in the municipality
where the defendant or any of the defendants resides
or may be served with summons." (Emphasis
supplied)

Settled is the principle in corporation law that the

residence of a corporation is the place where its
principal office is established. Since it is not disputed
that the Clavecilla Radio System has its principal
office in Manila, it follows that the suit against it may
properly be filed in the City of Manila.

The appellee maintain, however, that with the filing of

the action in Cagayan de Oro City, venue was
properly laid on the principle that the appellant may
also be served with summons in that city where it
maintains a branch office. This Court has already held
in the case of Cohen vs. Benguet Commercial Co.,
Ltd., 34 Phil. 526; that the term "may be served with
summons" does not apply when the defendant resides
in the Philippines for, in such case, he may be sued
only in the municipality of his residence, regardless of
the place where he may be found and served with
summons. As any other corporation, the Clavecilla
Radio System maintains a residence which is Manila
in this case, and a person can have only one residence
at a time (See Alcantara vs. Secretary of the Interior,
61 Phil. 459; Evangelists vs. Santos, 86 Phil. 387).
The fact that it maintains branch offices in some parts
of the country does not mean that it can be sued in any
of these places. To allow an action to be instituted in
any place where a corporate entity has its branch
offices would create confusion and work untold
inconvenience to the corporation.

It is important to remember, as was stated by this

Court in Evangelista vs. Santos, et al., supra, that the
laying of the venue of an action is not left to plaintiff's
caprice because the matter is regulated by the Rules of
Court. Applying the provision of the Rules of Court,
the venue in this case was improperly laid.

[G.R. No. L-28398. August 6, 1975.]
COMMISSIONER OF INTERNAL
REVENUE, Petitioner, v. JOHN L. MANNING,
W.D. McDONALD, E.E. SIMMONS and THE
COURT OF TAX APPEALS, Respondents.
Solicitor General Antonio P. Barredo, Solicitor
Lolita O. Gal-lang and Special Attorney Virgilio J.
Saldajena for Petitioner.
Manuel O. Chan for Private Respondents.
SYNOPSIS
Under a trust agreement, Julius Reese who owned
24,700 shares of the 25,000 common shares of
MANTRASCO, and the three private respondents
who owned the rest, at 100 shares each, deposited all
their shares with the Trustees. The trust agreement
provided that upon Reese’s death MANTRASCO
shall purchase Reese’s shares. The trust agreement
was executed in view of Reese’s desire that upon his
death the Company would continue under the
management of respondents. Upon Reese’s death and
partial payment by the company of Reeses’s share, a
new certificate was issued in the name of
MANTRASCO, and the certificate indorsed to the
Trustees. Subsequently, the stockholders reverted the
24,700 shares in the Treasury to the capital account of
the company as stock dividends to be distributed to
the stockholders. When the entire purchase price of
Reese’s interest in the company was paid in full by
the latter, the trust agreement was terminated, and the
shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the
distribution of the 24,700 shares of Reese as stock
dividends was in effect a distribution of the "assets or
property of the corporation." It therefore assessed
respondents for deficiency income taxes as well as for
fraud penalty and interest charges. The Court of Tax
Appeals absolved respondent from any liability for
receiving the questioned stock dividends on the
ground that their respective one-third interest in the
Company remained the same before and after the
declaration of the stock dividends and only the
number of shares held by each of them had changed.
On a petition for review, the Supreme Court held that
the newly acquired shares were not treasury shares;
their declaration as treasury stock dividends was a
complete nullity and that the assessment by the
Commissioner of fraud penalty and the imposition of
interest charges pursuant to the provision of the Tax
Code were made in accordance with law.
Judgment of the Court of Tax Appeals se aside.
SYLLABUS
1. PRIVATE CORPORATIONS; SHARES OF
STOCKS; TREASURY; SHARES. — Treasury
shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase,
donation, forfeiture or other means. They are therefore
issued shares, but being in the treasury they do not
have the status of outstanding shares. Consequently,
although a treasury share, not having been retired by
the corporation re-acquiring it, may be re-issued or
sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by
the corporation to itself, nor in the meetings of the
corporations as voting stock, for otherwise equal
distribution of voting powers among stockholders will
be effectively lost and the directors will be able to
perpetuate their control of the corporation though it
still represent a paid — for interest in the property of
the corporation.
2. ID.; ID.; ID.; DECLARATION OF QUESTIONED
SHARES AS TREASURY STOCK DIVIDENDS, A
NULLITY. — Where the manifest intention of the
parties to the trust agreement was, in sum and
substance, to treat the shares of a deceased
stockholder as absolutely outstanding shares of said
stockholder’s estate until they were fully paid. the
declaration of said shares as treasury stock dividend
was a complete nullity and plainly violative of public
policy.
3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY
FROM RETAINED EARNINGS. — A stock
dividend, being one payable in capital stock, cannot
be declared out of outstanding corporate stock, but
only from retained earnings.
4. ID.; ID.; PURCHASE OF HOLDING
RESULTING IN DISTRIBUTION OF EARNINGS
TAXABLE. — Where by the use of a trust instrument
as a convenient technical device, respondents
bestowed unto themselves the full worth and value of
a deceased stockholder’s corporate holding acquired
with the very earnings of the companies, such package
device which obviously is not designed to carry out
the usual stock dividend purpose of corporate
expansion reinvestment, e.g., the acquisition of
additional facilities and other capital budget items, but
exclusively for expanding the capital base of the
surviving stockholders in the company, cannot be
allowed to deflect the latter’s responsibilities toward
our income tax laws. The conclusion is ineluctable
that whenever the company parted with a portion of
its earnings "to buy" the corporate holdings of the
deceased stockholders, it was in ultimate effect and
result making a distribution of such earnings to the
surviving stockholders. All these amounts are
consequently subject to income tax as being, in truth
and in fact, a flow of cash benefits to the surviving
stockholders.
5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT
BASED ON THE TOTAL ACQUISITION COST OF
THE ALLEGED TREASURY STOCK DIVIDENDS,
ERROR. — Where the surviving stockholders, by
resolution, partitioned among themselves, as treasury
stock dividends, the deceased stockholder’s interest,
and earnings of the corporation over a period of years
were used to gradually wipe out the holdings therein
of said deceased stockholder, the earnings (which in
effect have been distributed to the surviving
stockholders when they appropriated among
themselves the deceased stockholder’s interest),
should be taxed for each of the corresponding years
when payments were made to the deceased’s estate on
account of his shares. In other words, the Tax
Commissioner may not asses the surviving
stockholders, for income tax purposes, the total
acquisition cost of the alleged treasury stock
dividends in one lump sum. However, with regard to
payment made with the corporation’s earnings before
the passage of the resolution declaring as stock
dividends the deceased stockholder’s interest (while
indeed those earnings were utilized in those years to
gradually pay off the value of the deceased
stockholder’s holdings), the surviving stockholders
should be liable (in the absence of evidence that prior
to the passage of the stockholder’s resolution the
contributed of each of the surviving stockholder rose
corresponding), for income tax purposes, to the extent
of the aggregate amount paid by the corporation (prior
to such resolution) to buy off the deceased
stockholder’s shares. The reason is that it was only by
virtue of the authority contained in said resolution that
the surviving stockholders actually, albeit illegally,
appropriated and petitioned among themselves the
stockholders equity representing the deceased
stockholder’s interest.
6. TAXATION; INCOME TAX; ASSESSMENT OF
FRAUD PENALTY AND IMPOSITION OF
INTEREST CHARGES IN ACCORDANCE WITH
LAW DESPITE NULLITY OF RESOLUTION
AUTHORIZING DISTRIBUTION OF EARNINGS.
— The fact that the resolution authorizing the
distribution of earnings is null and void is of no
moment. Under the National Internal Revenue Code,
income tax is assessed on income received from any
property, activity or service that produces income.
The Tax Code stands as an indifferent, neutral party
on the matter of where the income comes from. The
action taken by the Commissioner of assessing fraud
penalty and imposing interest charges pursuant to the
provisions of the Tax Code is in accordance with law.
DECISION
CASTRO, J.:
This is a petition for review of the decision of the
Court of Tax Appeals, in CTA case 1626, which set
aside the income tax assessments issued by the
Commissioner of Internal Revenue against John L.
Manning, W.D. McDonald and E.E. Simmons
(hereinafter referred to as the respondents), for alleged
undeclared stock dividends received in 1958 from the
Manila Trading and Supply Co. (hereinafter referred
to as the MANTRASCO) valued at P7,973,660.
In 1952 the MANTRASCO had an authorized capital
stock of P2,500,000 divided into 25,000 common
shares; 24,700 of these were owned by Julius S.
Reese, and the rest, at 100 shares each, by the three
respondents.
On February 29, 1952, in view of Reese’s desire that
upon his death MANTRASCO and its two
subsidiaries, MANTRASCO (Guam), Inc. and the
Port Motors, Inc., would continue under the
management of the respondents, a trust agreement on
his and the respondents’ interests in MANTRASCO
was executed by and among Reese (therein referred to
as OWNER), MANTRASCO (therein referred to as
COMPANY), the law firm of Ross, Selph, Carrascoso
and Janda (therein referred to as TRUSTEES), and the
respondents (therein referred to as MANAGERS).
The trust agreement pertinently provides as
follows:jgc:chanrobles.com.ph
"1. Upon the execution of this agreement the OWNER
shall deposit with the TRUSTEES, duly endorsed and
ready for transfer Twenty-Four Thousand Seven
Hundred (24,700) shares of the capital stock of the
COMPANY, these shares being all shares of the
capital stock of the COMPANIES belonging to him . .
.
"2. Upon the execution of this Agreement the
MANAGERS shall deposit with the TRUSTEES, duly
endorsed and ready for transfer, all shares of the
capital stock of the COMPANIES belonging to any of
them.
"3. (a) The OWNER and the MANAGERS, and each
of them, agree that if any of them shall at any time
during the life of this trust acquire any additional
shares of stock of any of the COMPANIES, or of any
successor company, or any shares in substitution,
exchange or replacement of the shares subject to this
agreement, they shall forthwith endorse and deposit
such shares with the TRUSTEES hereunder and such
additional or other shares shall become subject to this
agreement; shares deposited by the OWNER and
shares received by the TRUSTEES as stock dividends
on, or in substitution, exchange or replacement of,
such shares so deposited under this agreement being
MANAGERS’ SHARES.
"(b) All shares deposited under paragraphs 1, 2 and
3(a) hereof shall, during the life of the OWNER,
remain in the name of and shall be voted by the
respective parties making the deposit ...
"4. (a) Upon the death of the OWNER and the receipt
by the TRUSTEES of the initial payment from the
company purchasing the OWNER’S SHARES, the
TRUSTEES shall cause the OWNER’S SHARES to
be transferred into the name of such company and
such company shall thereupon transfer such shares
into the name of the TRUSTEES and the TRUSTEES
shall hold such shares until payment for all such
shares shall have been made by the company as
provided in this agreement.
x       x       x
"(c) The TRUSTEES shall vote all stock standing in
their name or the name of their nominees at all
meetings and shall be in all respects entitled to all the
rights as owners of said shares, subject, however, to
the provisions of this agreement of trust.
"(d) Any and all dividends paid on said shares after
the death of the OWNER shall be subject to the
provisions of this agreement.
x       x       x
"5. (b) It is expressly agreed and understood, however,
that the declaration of dividends and amount of
earnings transferred to surplus shall be subject to the
approval of the TRUSTEES and the TRUSTEES shall
participate to such extent in the affairs of the
COMPANIES as they deem necessary to insure the
carrying out of this agreement and the discharge of the
obligations of the COMPANIES and each of them and
of the MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more
directors of each of the COMPANIES as they shall
consider advisable and corresponding shares shall be
transferred to such directors to qualify them to act.
x       x       x
"8. (a) Upon the death of the OWNER, the
COMPANIES or any one or more of them shall
purchase the OWNER’S SHARES; it being the intent
that any of the COMPANIES shall purchase all or a
proportionate part of the OWNER’S SHARES . . .
"(b) The purchase price of such shares shall be the
book value of such share computed in United States
dollars . . .
x       x       x
"(d) All dividends paid on stock that had been
OWNER’S SHARES, from the time of the transfer of
such shares by one or more of the COMPANIES to
the TRUSTEES as provided in Article 4 until
payment in full for such OWNER’S SHARES shall
have been made by each of the COMPANIES which
shall have purchased the same, shall be credited as
payments on account of the purchase price of such
shares and shall be a prepayment on account of the
next due installment or installments of such purchase
price.
x       x       x
"12. The TRUSTEES may from time to time increase
or decrease the unpaid balance of the purchase price
of the shares being purchased by any COMPANY or
COMPANIES should they in their exclusive
discretion determine that such increase or decrease
would be necessary to carry out the intention of the
parties that the Estate and heirs of the OWNER shall
receive the fair value of the shares deposited in Trust
as such value existed at the date of the death of the
OWNER. . .
"13. Should the said COMPANIES or any of them be
unable or unwilling to comply with their obligations
hereunder when due, the TRUSTEES may terminate
this agreement and dispose of all the shares of stock
deposited hereunder, whether or not payment shall
have been made for part of such stock, applying the
proceeds of such sale or disposition to the unpaid
balance of the purchase price:jgc:chanrobles.com.ph
"(a) If, upon any such sale or disposition of the stock,
the TRUSTEES shall receive an amount in excess of
the unpaid balance of the purchase price agreed to be
paid by the COMPANIES for the OWNER’S
SHARES such excess, after deducting all expenses,
charges and taxes, shall be paid to the then
MANAGERS.
x       x       x
"17. Until the delivery to him of the shares purchased
by him, no MANAGER, shall sell, assign, mortgage,
pledge, transfer or in anywise encumber or
hypothecate such shares or his interest in this
agreement.
x       x       x
"19. After the death of the OWNER and during the
period of this trust the COMPANIES shall pay no
dividends except as may be authorized by the
TRUSTEES. Dividends on MANAGER’S SHARES
shall, so long as they shall not be in default under this
agreement, be paid over by the TRUSTEES to the
MANAGERS. Dividends on OWNER’S SHARES
shall be applied in liquidation of the COMPANIES’
liabilities hereunder as provided in Article 8(d).
x       x       x
"26. The TRUSTEES may, after the death of the
OWNER and during the life of this trust, vote any and
all shares held in trust, at any general and special
meeting of stockholders for all purposes, including
but not limited to wholly or partially liquidating or
reducing the capital of any COMPANY or
COMPANIES, authorizing the sale of any or all
assets, and election of directors . . .
x       x       x
declared as dividends had been proportionately
distributed to the respondents, representing a total
book value or acquisition cost of P7,973,660; (b) the
respondents failed to declare the said stock dividends
as part of their taxable income for the year 1958; and
(c) from 1956 to 1961 the following amounts were
paid by MANTRASCO to Reese’s estate by virtue of
the trust agreement, to wit:chanrob1es virtual 1aw
library

"28. The COMPANIES and each of them undertake Amounts

and agree by proper corporate act to reduce their
capitalization, sell or encumber their assets, amend Year Liabilities Paid
their articles of incorporation, reorganize, liquidate,
dissolve and do all other things the TRUSTEES in 1956 P5,830,587.86 P 2,143,073.00
their discretion determine to be necessary to enable
them to comply with their obligations hereunder and 1957 5,317,137.86 513,450.00
the TRUSTEES are hereby irrevocably authorized to
vote all shares of the COMPANIES and each of them 1958 4,824,059.28 493,078.58
at any general or special meeting for the
accomplishment of such purposes. . . ."cralaw 1959 4,319,420.14 504,639.14
virtua1aw library
1960 3,849,720.14 469,700.00
On October 19, 1954 Reese died. The projected
transfer of his shares in the name of MANTRASCO 1961 3,811,387.69 38,332.45
could not, however, be immediately effected for lack
of sufficient funds to cover initial payment on the On the basis of their examination, the BIR examiners
shares. concluded that the distribution of Reese’s shares as
stock dividends was in effect a distribution of the
On February 2, 1955, after MANTRASCO made a "asset or property of the corporation as may be
partial payment of Reese’s shares, the certificate for gleaned from the payment of cash for the redemption
the 24,700 shares in Reese’s name was cancelled and of said stock and distributing the same as stock
a new certificate was issued in the name of dividend." On April 14, 1965 the Commissioner of
MANTRASCO. On the same date, and in the Internal Revenue issued notices of assessment for
meantime that Reese’s interest had not been fully deficiency income taxes to the respondents for the
paid, the new certificate was endorsed to the law firm year 1958, as follows:chanrob1es virtual 1aw library
of Ross, Selph, Carrascoso and Janda, as trustees for
and in behalf of MANTRASCO. J.L. Manning W.D. McDonald E.E. Simmons

On December 22, 1958, at a special meeting of Deficiency Income Tax P1,416,469.00 P1,442,719.00
MANTRASCO stockholders, the following resolution P1,450,434.00
was passed:jgc:chanrobles.com.ph
Add 50% surcharge* 723,234.50 721,359.507
"RESOLVED, that the 24,700 shares in the Treasury 25,217.00
be reverted back to the capital account of the company
as a stock dividend to be distributed to shareholders of 1/2% monthly interest from
record at the close of business on December 22, 1958,
in accordance with the action of the Board of 6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12
Directors at its meeting on December 19, 1958 which
action is hereby approved and confirmed."cralaw ———— ———— ————
virtua1aw library
TOTAL AMOUNT DUE
On November 25, 1963 the entire purchase price of
Reese’s interest in MANTRASCO was finally paid in & COLLECTIBLE P2,430,067.92 P2,423,767.92
full by the latter, On May 4, 1964 the trust agreement 2,436,729.12
was terminated and the trustees delivered to
MANTRASCO all the shares which they were The respondents unsuccessfully challenged the
holding in trust. foregoing assessments and, failing to secure a
favorable reconsideration, appealed to the Court of
Meanwhile, on September 14, 1962, an examination Tax Appeals.
of MANTRASCO’s books was ordered by the Bureau
of Internal Revenue. The examination disclosed that On October 30, 1967 the CTA rendered judgment
(a) as of December 31, 1958 the 24,700 shares absolving the respondents from any liability for
receiving the questioned stock dividends on the
ground that their respective one-third interest in
MANTRASCO remained the same before and after
the declaration of stock dividends and only the
number of shares held by each of them had changed.
Hence, the present recourse.
All the parties rely upon the same provisions of the
Tax Code and internal revenue regulations to bolster
their respective positions. These are:chanrob1es
virtual 1aw library
A. National Internal Revenue Code
"SEC. 83. Distribution of dividends or assets by
corporations — (a) Definition of Dividends — The
term ‘dividends’ when used in this Title means any
distribution made by a corporation to its shareholders
out of its earnings or profits accrued since March first,
nineteen hundred and thirteen, and payable to its
shareholders, whether in money or in other property.
"Where a corporation distributes all of its assets in
complete liquidation or dissolution the gain realized
or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or
deductible loss, as the case may be.
"(b) Stock dividend. — A stock dividend representing
the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels or
redeems stock issued as a dividend at such time and in
such manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable
income to the extent that it represents a distribution of
earnings or profits accumulated after March first,
nineteen hundred and thirteen."cralaw virtua1aw
library
B. B.I.R. Regulations
"SEC. 251. Dividends paid in property. — Dividends
paid in securities or other property (other than its own
stock), in which the earnings of the corporation have
been invested, are income to the recipients to the
amount of the full market value of such property when
receivable by individual stockholders . . .
"SEC. 252. Stock dividend. — A stock dividend
which represents the transfer of surplus to capital
account is not subject to income tax. However, a
dividend in stock may constitute taxable income to the
recipients thereof notwithstanding the fact that the
officers or directors of the corporation (as defined in
section 84) choose to call such distribution as a stock
dividend. The distinction between a stock dividend
which does not, and one which does, constitute
income taxable to the shareholders is the distinction
between a stock dividend which works no change in
the corporate entity, the same interest in the same
corporation being represented after the distribution by
more shares of precisely the same character, and a
stock dividend where there either has been change of
corporate identity or a change in the nature of the
shares issued as dividends whereby the proportional
interest of the shareholder after the distribution is
essentially different from the former interest. A stock
dividend constitutes income if it gives the shareholder
an interest different from that which his former
stockholdings represented. A stock dividend does not
constitute income if the new shares confer no different
rights or interests than did the old — the new
certificate plus the old representing the same
proportionate interest in the net assets of the
corporation as did the old."cralaw virtua1aw library
The parties differ, however, on the taxability of the
"treasury" stock dividends received by the
respondents.
The respondents anchor their argument on the same
basis as the Court of Tax Appeals; whereas the
Commissioner maintains that the full value
(P7,973,660) of the shares redeemed from Reese by
MANTRASCO which were subsequently distributed
to the respondents as stock dividends in 1958 should
be taxed as income of the respondents for that year,
the said distribution being in effect a distribution of
cash. The respondents’ interests in MANTRASCO, he
further argues, were only .4% prior to the declaration
of the stock dividends in 1958, but rose to 33 1/3%
each after the said declaration.
In submitting their respective contentions, it is the
assumption of both parties that the 24,700 shares
declared as stock dividends were treasury shares. We
are however convinced, after a careful study of the
trust agreement, that the said shares were not, on
December 22, 1958 or at anytime before or after that
date, treasury shares. The reasons are quite plain.
Although authorities may differ on the exact legal and
accounting status of so-called "treasury shares," 1 they
are more or less in agreement that treasury shares are
stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or
other means. 2 Treasury shares are therefore issued
shares, but being in the treasury they do not have the
status of outstanding shares. 3 Consequently, although
a treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or sold
again, such share, as long as it is held by the
corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by
the corporation to itself, 4 nor in the meetings of the
corporation as voting stock, for otherwise equal
distribution of voting powers among stockholders will
be effectively lost and the directors will be able to
perpetuate their control of the corporation, 5 though it
still represents a paid-for interest in the property of the
corporation. 6 The foregoing essential features of a
treasury stock are lacking in the questioned shares.
Thus,
(a) under paragraph 4(c) of the trust agreement, the
trustees were authorized to vote all stock standing in
their names at all meetings and to exercise all rights
"as owners of said shares" — this authority is
reiterated in paragraphs 26 and 28 of the trust
agreement;
(b) under paragraph 4(d), "Any and all dividends paid
on said shares after the death of the OWNER shall be
subject to the provisions of this agreement;"
(c) under paragraph 5(b), the amount of retained
earnings to be declared as dividends was made subject
to the approval of the trustees of the 24,700 shares;
(d) under paragraph 5(c), the choice of corporate
directors was delegated exclusively to the trustees
who were also given the authority to transfer
qualifying shares to such directors; and
(e) under paragraph 19, MANTRASCO and its two
subsidiaries were expressly prohibited from paying
"dividends except as may be authorized by the
TRUSTEES;" in the same paragraph mention was also
made of "dividends on OWNER’S SHARES" which
shall be applied to the liquidation of the liabilities of
the three companies for the price of Reese’s shares.
The manifest intention of the parties to the trust
agreement was, in sum and substance, to treat the
24,700 shares of Reese as absolutely outstanding
shares of Reese’s estate until they were fully paid.
Such being the true nature of the 24,700 shares, their
declaration as treasury stock dividend in 1958 was a
complete nullity and plainly violative of public policy.
A stock dividend, being one payable in capital stock,
cannot be declared out of outstanding corporate stock,
but only from retained earnings: 7 We are of the opinion, however, that the
Of pointed relevance is this useful discussion of the
nature of a stock dividend: 8 treasury stock dividends in one lump sum. The record
"‘A stock dividend always involves a transfer of
surplus (or profit) to capital stock.’ Graham and Katz,
Accounting in Law Practice, 2d ed. 1938, No. 70. As
the court said in United States v. Siegel, 8 Cir., 1931,
52 F 2d 63, 65, 78 ALR 672: ‘A stock dividend is a
conversion of surplus or undivided profits into capital
stock, which is distributed to stockholders in lieu of a
cash dividend.’ Congress itself has defined the term
‘dividend’ in No. 115(a) of the Act as meaning any
distribution made by a corporation to its shareholders,
whether in money or in other property, out of its
earnings or profits. In Eisner v. Macomber, 1920, 252
US 189, 40 S Ct 189, 64 L Ed 521, 9 ALR 1570, both
the prevailing and the dissenting opinions recognized
that within the meaning of the revenue acts the
essence of a stock dividend was the segregation out of
surplus account of a definite portion of the corporate
earnings as part of the permanent capital resources of
the corporation by the device of capitalizing the same,
and the issuance to the stockholders of additional
shares of stock representing the profits so
capitalized."cralaw virtua1aw library
The declaration by the respondents and Reese’s
trustees of MANTRASCO’s alleged treasury stock
dividends in favor of the former, brings, however, into
clear focus the ultimate purpose which the parties to
the trust instrument aimed to realize: to make the
respondents the sole owners of Reese’s interest in
MANTRASCO by utilizing the periodic earnings of
that company and its subsidiaries to directly subsidize
their purchase of the said interests, and by making it
appear outwardly, through the formal declaration of
non-existent stock dividends in the treasury, that they
have not received any income from those firms when,
in fact, by that declaration they secured to themselves
the means to turn around as full owners of Reese’s
shares. In other words, the respondents, using the trust
instrument as a convenient technical device, bestowed
unto themselves the full worth and value of Reese’s
corporate holdings with the use of the very earnings of
the companies. Such package device, obviously not
designed to carry out the usual stock dividend purpose
of corporate expansion reinvestment, e.g. the
acquisition of additional facilities and other capital
budget items, but exclusively for expanding the
capital base of the respondents in MANTRASCO,
cannot be allowed to deflect the respondents’
responsibilities toward our income tax laws. The
conclusion is thus ineluctable that whenever the
companies involved herein parted with a portion of
their earnings "to buy" the corporate holdings of
Reese, they were in ultimate effect and result making
a distribution of such earnings to the respondents. All
these amounts are consequently subject to income tax
as being, in truth and in fact, a flow of cash benefits to
the respondents.
Commissioner erred in assessing the respondents the
total acquisition cost (P7,973,660) of the alleged
shows that the earnings of MANTRASCO over a
period of years were used to gradually wipe out the
holdings therein of Reese. Consequently, those
earnings, which we hold, under the facts disclosed in
the case at bar, as in effect having been distributed to
the respondents, should be taxed for each of the
corresponding years when payments were made to
Reese’s estate on account of his 24,700 shares. With
regard to payments made with MANTRASCO
earnings in 1958 and the years before, while indeed
those earnings were utilized in those years to
gradually pay off the value of Reese’s holdings in
MANTRASCO, there is no evidence from which it
can be inferred that prior to the passage of the
stockholders’ resolution of December 22, 1958 the
contributed equity of each of the respondents rose
correspondingly. It was only by virtue of the authority
contained in the said resolution that the respondents
actually, albeit illegally, appropriated and partitioned
among themselves the stockholders’ equity
representing Reese’s interests in MANTRASCO. As
those payments accrued in favor of the respondents in
1958 they are and should be liable, for income tax
purposes, to the extent of the aggregate amount paid,
from 1955 to 1958, by MANTRASCO to buy off
Reese’s shares.
The fact that the resolution authorizing the
distribution of the said earnings is null and void is of
no moment. Under the National Internal Revenue
Code, income tax is assessed on income received from
any property, activity or service that produces income.
9 The Tax Code stands as an indifferent, neutral party
on the matter of where the income comes from. 10
Subject to the foregoing qualifications, we find the
action taken by the Commissioner in all other respects
— that is, the assessment of a fraud penalty and
imposition of interest charges pursuant to the
provisions of the Tax Code — to be in accordance
with law.
ACCORDINGLY, the judgment of the Court of Tax
Appeals absolving the respondents from any
deficiency income tax liability is set aside, and this
case is hereby remanded to the Court of Tax Appeals
for further proceedings. More specifically, the Court
of Tax Appeals shall recompute the income tax
liabilities of the respondents in accordance with this
decision and with the Tax Code, and thereafter
pronounce and enter judgment accordingly. No costs.
G.R. No. L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT CO.,
INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of
First Instance of Manila absolving the defendant from
the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels
of land situated in the barrio of Linao, town of Aparri,
Province of Cagayan, as evidenced by transfer
certificate of title No. 217 of the land records of
Cagayan, a copy of which is in evidence as Exhibit 1.
To guarantee the payment of a loan in the sum of
P8,000, Manuel Tabora, on August 14, 1929, executed
in favor of the Philippine National Bank a first
mortgage on the four parcels of land above-
mentioned. A second mortgage in favor of the same
bank was in April of 1930 executed by Tabora over
the same lands to guarantee the payment of another
loan amounting to P7,000. A third mortgage on the
same lands was executed on April 16, 1930 in favor of
Severina Buzon to whom Tabora was indebted in the
sum of P2,9000. These mortgages were registered and
annotations thereof appear at the back of transfer
certificate of title No. 217.
On May 31, 1930, Tabora executed a public document
entitled "Escritura de Transpaso de Propiedad
Inmueble" (Exhibit A) by virtue of which the four
parcels of land owned by him was sold to the plaintiff
company, said to under process of incorporation, in
consideration of one peso (P1) subject to the
mortgages in favor of the Philippine National Bank
and Severina Buzon and, to the condition that the
certificate of title to said lands shall not be transferred
to the name of the plaintiff company until the latter
has fully and completely paid Tabora's indebtedness
to the Philippine National Bank.
The plaintiff company filed its article incorporation
with the Bureau of Commerce and Industry on
October 22, 1930 (Exhibit 2). A year later, on October
28, 1931, the board of directors of said company
adopted a resolution (Exhibit G) authorizing its
president, Jose Ventura, to sell the four parcels of
lands in question to Teodoro Sandiko for P42,000.
Exhibits B, C and D were thereafter made and
executed. Exhibit B is a deed of sale executed before a
notary public by the terms of which the plaintiff sold
ceded and transferred to the defendant all its right,
titles, and interest in and to the four parcels of land
described in transfer certificate in turn obligated
himself to shoulder the three mortgages hereinbefore
referred to. Exhibit C is a promisory note for P25,300.
drawn by the defendant in favor of the plaintiff,
payable after one year from the date thereof. Exhibit
D is a deed of mortgage executed before a notary
public in accordance with which the four parcels of
land were given a security for the payment of the
promissory note, Exhibit C. All these three instrument
were dated February 15, 1932.
The defendant having failed to pay the sum stated in
the promissory note, plaintiff, on January 25, 1934,
brought this action in the Court of First Instance of
Manila praying that judgment be rendered against the
defendant for the sum of P25,300, with interest at
legal rate from the date of the filing of the complaint,
and the costs of the suits. After trial, the court below,
on December 18, 1934, rendered judgment absolving
the defendant, with costs against the plaintiff. Plaintiff
presented a motion for new trial on January 14, 1935,
which motion was denied by the trial court on January
19 of the same year. After due exception and notice,
plaintiff has appealed to this court and makes an
assignment of various errors.
In dismissing the complaint against the defendant, the
court below, reached the conclusion that Exhibit B is
invalid because of vice in consent and repugnancy to
law. While we do not agree with this conclusion, we
have however voted to affirm the judgment appealed
from the reasons which we shall presently state.
The transfer made by Tabora to the Cagayan fishing
Development Co., Inc., plaintiff herein, was affected
on May 31, 1930 (Exhibit A) and the actual
incorporation of said company was affected later on
October 22, 1930 (Exhibit 2). In other words, the
transfer was made almost five months before the
incorporation of the company. Unquestionably, a duly
organized corporation has the power to purchase and
hold such real property as the purposes for which such
corporation was formed may permit and for this
purpose may enter into such contracts as may be
necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No.
1459). But before a corporation may be said to be
lawfully organized, many things have to be done.
Among other things, the law requires the filing of
articles of incorporation (secs. 6 et seq., Act. No.
1459). Although there is a presumption that all the
requirements of law have been complied with (sec.
334, par. 31 Code of Civil Procedure), in the case
before us it can not be denied that the plaintiff was not
yet incorporated when it entered into a contract of
sale, Exhibit A. The contract itself referred to the
plaintiff as "una sociedad en vias de incorporacion." It
was not even a de facto corporation at the time. Not
being in legal existence then, it did not possess
juridical capacity to enter into the contract.
Corporations are creatures of the law, and can
only come into existence in the manner
prescribed by law. As has already been stated,
general law authorizing the formation of
corporations are general offers to any persons
who may bring themselves within their
provisions; and if conditions precedent are
prescribed in the statute, or certain acts are
required to be done, they are terms of the
offer, and must be complied with substantially
before legal corporate existence can be
acquired. (14 C. J., sec. 111, p. 118.)
That a corporation should have a full and
complete organization and existence as an
entity before it can enter into any kind of a
contract or transact any business, would seem
to be self evident. . . . A corporation, until
organized, has no being, franchises or
faculties. Nor do those engaged in bringing it
into being have any power to bind it by
contract, unless so authorized by the charter
there is not a corporation nor does it possess
franchise or faculties for it or others to
exercise, until it acquires a complete
existence. (Gent vs. Manufacturers and
Merchant's Mutual Insurance Company, 107
Ill., 652, 658.)
Boiled down to its naked reality, the contract here
(Exhibit A) was entered into not between Manuel
Tabora and a non-existent corporation but between the
Manuel Tabora as owner of the four parcels of lands
on the one hand and the same Manuel Tabora, his
wife and others, as mere promoters of a corporations
on the other hand. For reasons that are self-evident,
these promoters could not have acted as agent for a
projected corporation since that which no legal
existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is,
as it were, a child in ventre sa mere. This is not saying
that under no circumstances may the acts of promoters
of a corporation be ratified by the corporation if and
when subsequently organized. There are, of course,
exceptions (Fletcher Cyc. of Corps., permanent
edition, 1931, vol. I, secs. 207 et seq.), but under the
peculiar facts and circumstances of the present case
we decline to extend the doctrine of ratification which
would result in the commission of injustice or fraud to
the candid and unwary.(Massachusetts rule, Abbott
vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L.
R. A., 586; 15 Am. St. Rep., 193; citing English cases;
Koppel vs. Massachusetts Brick Co., 192 Mass., 223;
78 N. E., 128; Holyoke Envelope Co., vs. U. S.
Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should
be observed that Manuel Tabora was the registered
owner of the four parcels of land, which he succeeded
in mortgaging to the Philippine National Bank so that
he might have the necessary funds with which to
convert and develop them into fishery. He appeared to
have met with financial reverses. He formed a
corporation composed of himself, his wife, and a few
others. From the articles of incorporation, Exhibit 2, it
appears that out of the P48,700, amount of capital
stock subscribed, P45,000 was subscribed by Manuel
Tabora himself and P500 by his wife, Rufina Q. de
Tabora; and out of the P43,300, amount paid on
subscription, P42,100 is made to appear as paid by
Tabora and P200 by his wife. Both Tabora and His
wife were directors and the latter was treasurer as
well. In fact, to this day, the lands remain inscribed in
Tabora's name. The defendant always regarded
Tabora as the owner of the lands. He dealt with
Tabora directly. Jose Ventura, president of the
plaintiff corporation, intervened only to sign the
contract, Exhibit B, in behalf of the plaintiff. Even the
Philippine National Bank, mortgagee of the four
parcels of land, always treated Tabora as the owner of
the same. (See Exhibits E and F.) Two civil suits
(Nos. 1931 and 38641) were brought against Tabora
in the Court of First Instance of Manila and in both
cases a writ of attachment against the four parcels of
land was issued. The Philippine National Bank
threatened to foreclose its mortgages. Tabora
approached the defendant Sandiko and succeeded in
the making him sign Exhibits B, C, and D and in
making him, among other things, assume the payment
of Tabora's indebtedness to the Philippine National
Bank. The promisory note, Exhibit C, was made
payable to the plaintiff company so that it may not
attached by Tabora's creditors, two of whom had
obtained writs of attachment against the four parcels
of land.

If the plaintiff corporation could not and did not

acquire the four parcels of land here involved, it
follows that it did not possess any resultant right to
dispose of them by sale to the defendant, Teodoro
Sandiko.

Some of the members of this court are also of the

opinion that the transfer from Manuel Tabora to the
Cagayan Fishing Development Company, Inc., which
transfer is evidenced by Exhibit A, was subject to a
condition precedent (condicion suspensiva), namely,
the payment of the mortgage debt of said Tabora to
the Philippine National Bank, and that this condition
not having been complied with by the Cagayan
Fishing Development Company, Inc., the transfer was
ineffective. (Art. 1114, Civil Code; Wise & Co. vs.
Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.)
However, having arrived at the conclusion that the
transfer by Manuel Tabora to the Cagayan Fishing
Development Company, Inc. was null because at the
time it was affected the corporation was non-existent,
we deem it unnecessary to discuss this
point.lawphil.net

The decision of the lower court is accordingly

affirmed, with costs against the appellant. So Ordered.
G.R. No. L-28113               March 28, 1969
THE MUNICIPALITY OF MALABANG,
LANAO DEL SUR, and AMER MACAORAO
BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN
MACAPUNUNG, HADJI HASAN
MACARAMPAD, FREDERICK V. DUJERTE
MONDACO ONTAL, MARONSONG ANDOY,
MACALABA INDAR LAO. respondents.
L. Amores and R. Gonzales for petitioners.
Jose W. Diokno for respondents.
CASTRO, J.:
  The petitioner Amer Macaorao Balindong is the
mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the
rest of the respondents are the councilors, of the
municipality of Balabagan of the same province.
Balabagan was formerly a part of the municipality of
Malabang, having been created on March 15, 1960, by
Executive Order 386 of the then President Carlos P.
Garcia, out of barrios and sitios 1 of the latter
municipality.
  The petitioners brought this action for prohibition to
nullify Executive Order 386 and to restrain the
respondent municipal officials from performing the
functions of their respective office relying on the
ruling of this Court in Pelaez v. Auditor
General 2 and Municipality of San Joaquin v. Siva. 3
  In Pelaez this Court, through Mr. Justice (now Chief
Justice) Concepcion, ruled: (1) that section 23 of
Republic Act 2370 [Barrio Charter Act, approved
January 1, 1960], by vesting the power to
create barrios in the provincial board, is a "statutory
denial of the presidential authority to create a
new barrio [and] implies a negation of
the bigger power to create municipalities," and (2)
that section 68 of the Administrative Code, insofar as
it gives the President the power to create
municipalities, is unconstitutional (a) because it
constitutes an undue delegation of legislative power
and (b) because it offends against section 10 (1) of
article VII of the Constitution, which limits the
President's power over local governments to mere
supervision. As this Court summed up its discussion:
"In short, even if it did not entail an undue delegation
of legislative powers, as it certainly does, said section
68, as part of the Revised Administrative Code,
approved on March 10, 1917, must be deemed
repealed by the subsequent adoption of the
Constitution, in 1935, which is utterly incompatible
and inconsistent with said statutory enactment."
  On the other hand, the respondents, while admitting
the facts alleged in the petition, nevertheless argue
that the rule announced in Pelaez can have no
application in this case because unlike the
municipalities involved in Pelaez, the municipality of
Balabagan is at least a de facto corporation, having
been organized under color of a statute before this was
declared unconstitutional, its officers having been
either elected or appointed, and the municipality itself
having discharged its corporate functions for the past
five years preceding the institution of this action. It is
contended that as a de facto corporation, its existence
cannot be collaterally attacked, although it may be
inquired into directly in an action for quo warranto at
the instance of the State and not of an individual like
the petitioner Balindong.
  It is indeed true that, generally, an inquiry into the
legal existence of a municipality is reserved to the
State in a proceeding for quo warranto or other direct
proceeding, and that only in a few exceptions may a
private person exercise this function of
government. 4 But the rule disallowing collateral
attacks applies only where the municipal corporation
is at least a de facto corporations. 5 For where it is
neither a corporation de jure nor de facto, but a
nullity, the rule is that its existence may be,
questioned collaterally or directly in any action or
proceeding by any one whose rights or interests ate
affected thereby, including the citizens of the territory
incorporated unless they are estopped by their conduct
from doing so. 6
  And so the threshold question is whether the
municipality of Balabagan is a de facto corporation.
As earlier stated, the claim that it is rests on the fact
that it was organized before the promulgation of this
Court's decision in Pelaez. 7
  Accordingly, we address ourselves to the question
whether a statute can lend color of validity to an
attempted organization of a municipality despite the
fact that such statute is subsequently declared
unconstitutional.lawphi1.ñet
  This has been a litigiously prolific question, sharply
dividing courts in the United States. Thus, some hold
that a de facto corporation cannot exist where the
statute or charter creating it is unconstitutional
because there can be no de facto corporation where
there can be no de jure one, 8 while others hold
otherwise on the theory that a statute is binding until it
is condemned as unconstitutional. 9
  An early article in the Yale Law Journal offers the
following analysis:
  It appears that the true basis for denying to
the corporation a de facto status lay in the
absence of any legislative act to give vitality
to its creation. An examination of the cases
holding, some of them unreservedly, that a de
facto office or municipal corporation can
exist under color of an unconstitutional statute
will reveal that in no instance did the invalid
act give life to the corporation, but that either
in other valid acts or in the constitution itself
the office or the corporation was potentially
created....
  The principle that color of title under an
unconstitutional statute can exist only where
there is some other valid law under which the
organization may be effected, or at least an
authority in potentia by the state constitution,
has its counterpart in the negative
propositions that there can be no color of
authority in an unconstitutional statute that
plainly so appears on its face or that attempts
to authorize the ousting of a de jure or de
facto municipal corporation upon the same
territory; in the one case the fact would imply
the imputation of bad faith, in the other the
new organization must be regarded as a mere
usurper....
  As a result of this analysis of the cases the
following principles may be deduced which
seem to reconcile the apparently conflicting
decisions:
I. The color of authority requisite to
the organization of a de
facto municipal corporation may be:
1. A valid law enacted by the
legislature.
2. An unconstitutional law,
valid on its face, which has
either (a) been upheld for a
time by the courts or (b) not
yet been declared
void; provided that a warrant
for its creation can be found
in some other valid law or in
the recognition of its potential
existence by the general laws
or constitution of the state.
II. There can be no de facto municipal
corporation unless either directly or
potentially, such a de jure corporation
is authorized by some legislative fiat.
III. There can be no color of authority
in an unconstitutional statute alone,
the invalidity of which is apparent on
its face.
  IV. There can be no de facto corporation
created to take the place of an existing de
jure corporation, as such organization would
clearly be a usurper.10
  In the cases where a de facto municipal corporation
was recognized as such despite the fact that the statute
creating it was later invalidated, the decisions could
fairly be made to rest on the consideration that there
was some other valid law giving corporate vitality to
the organization. Hence, in the case at bar, the mere
fact that Balabagan was organized at a time when the
statute had not been invalidated cannot conceivably
make it a de facto corporation, as, independently of
the Administrative Code provision in question, there
is no other valid statute to give color of authority to its
creation. Indeed, in Municipality of San Joaquin v.
Siva, 11 this Court granted a similar petition for
prohibition and nullified an executive order creating
the municipality of Lawigan in Iloilo on the basis of
the Pelaez ruling, despite the fact that the
municipality was created in 1961, before section 68 of
the Administrative Code, under which the President
had acted, was invalidated. 'Of course the issue of de
facto municipal corporation did not arise in that case.
  In Norton v. Shelby Count, 12 Mr. Justice Field said:
"An unconstitutional act is not a law; it confers no
rights; it imposes no duties; it affords no protection; it
creates no office; it is, in legal contemplation, as
inoperative as though it had never been passed."
Accordingly, he held that bonds issued by a board of
commissioners created under an invalid statute were
unenforceable.
  Executive Order 386 "created no office." This is not
to say, however, that the acts done by the municipality
of Balabagan in the exercise of its corporate powers
are a nullity because the executive order "is, in legal
contemplation, as inoperative as though it had never
been passed." For the existence of Executive, Order
386 is "an operative fact which cannot justly be
ignored." As Chief Justice Hughes explained
in Chicot County Drainage District v. Baxter State
Bank: 13
  The courts below have proceeded on the
theory that the Act of Congress, having been
found to be unconstitutional, was not a law;
that it was inoperative, conferring no rights
and imposing no duties, and hence affording
no basis for the challenged decree. Norton v.
Shelby County, 118 U.S. 425, 442; Chicago,
I. & L. Ry. Co. v. Hackett, 228 U.S. 559, 566.
It is quite clear, however, that such broad
statements as to the effect of a determination
of unconstitutionality must be taken with
qualifications. The actual existence of a
statute, prior to such a determination, is an
operative fact and may have consequences
which cannot justly be ignored. The past
cannot always be erased by a new judicial
declaration. The effect of the subsequent
ruling as to invalidity may have to be
considered in various aspects — with respect
to particular relations, individual and
corporate, and particular conduct, private and
official. Questions of rights claimed to have
 become vested, of status of prior
determinations deemed to have finality and
acted upon accordingly, of public policy in
the light of the nature both of the statute and
of its previous application, demand
examination. These questions are among the
most difficult of those which have engaged
the attention of courts, state and federal, and it
is manifest from numerous decisions that an
all-inclusive statement of a principle of
absolute retroactive invalidity cannot be
justified.

  There is then no basis for the respondents'

apprehension that the invalidation of the executive
order creating Balabagan would have the effect of
unsettling many an act done in reliance upon the
validity of the creation of that municipality. 14

  ACCORDINGLY, the petition is granted, Executive

Order 386 is declared void, and the respondents are
hereby permanently restrained from performing the
duties and functions of their respective offices. No
pronouncement as to costs.
.R. No. L-2598             June 29, 1950
C. ARNOLD HALL and BRADLEY P.
HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of
First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his
capacity as receiver of the Far Eastern Lumber
and Commercial Co., Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in
civil case No. 381 of the Court of First Instance of
Leyte and to enjoin the respondent judge from further
acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold
Hall and Bradley P. Hall, and the respondents Fred
Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella, signed and acknowledged in
Leyte, the article of incorporation of the Far Eastern
Lumber and Commercial Co., Inc., organized to
engage in a general lumber business to carry on as
general contractors, operators and managers, etc.
Attached to the article was an affidavit of the treasurer
stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties
transferred to the corporation described in a list
appended thereto.
(2) Immediately after the execution of said articles of
incorporation, the corporation proceeded to do
business with the adoption of by-laws and the election
of its officers.
(3) On December 2, 1947, the said articles of
incorporation were filed in the office of the Securities
and Exchange Commissioner, for the issuance of the
corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles
of incorporation by the aforesaid governmental office,
the respondents Fred Brown, Emma Brown, Hipolita
D. Chapman and Ceferino S. Abella filed before the
Court of First Instance of Leyte the civil case
numbered 381, entitled "Fred Brown et al. vs. Arnold
C. Hall et al.", alleging among other things that the
Far Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to have it
dissolved because of bitter dissension among the
members, mismanagement and fraud by the managers
and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall
and Bradley P. Hall, filed a motion to dismiss,
contesting the court's jurisdiction and the sufficiently
of the cause of action.
(6) After hearing the parties, the Hon. Edmund S.
Piccio ordered the dissolution of the company; and at
the request of plaintiffs, appointed of the properties
thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered
to file a counter-bond for the discharge of the receiver,
but the respondent judge refused to accept the offer
and to discharge the receiver. Whereupon, the present
special civil action was instituted in this court. It is
based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381
to decree the dissolution of the company, because it
being a de facto corporation, dissolution thereof may
only be ordered in a quo warranto proceeding
instituted in accordance with section 19 of the
Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma
Brown had signed the article of incorporation but only
a partnership.
Discussion: The second proposition may at once be
dismissed. All the parties are informed that the
Securities and Exchange Commission has not, so far,
issued the corresponding certificate of incorporation.
All of them know, or sought to know, that the
personality of a corporation begins to exist only from
the moment such certificate is issued — not before
(sec. 11, Corporation Law). The complaining
associates have not represented to the others that they
were incorporated any more than the latter had made
similar representations to them. And as nobody was
led to believe anything to his prejudice and damage,
the principle of estoppel does not apply. Obviously
this is not an instance requiring the enforcement of
contracts with the corporation through the rule of
estoppel.
The first proposition above stated is premised on the
theory that, inasmuch as the Far Eastern Lumber and
Commercial Co., is a de facto corporation, section 19
of the Corporation Law applies, and therefore the
court had not jurisdiction to take cognizance of said
civil case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations
claiming in good faith to be a corporation
under this Act and its right to exercise
corporate powers shall not be inquired into
collaterally in any private suit to which the
corporation may be a party, but such inquiry
may be had at the suit of the Insular
Government on information of the Attorney-
General.
There are least two reasons why this section does not
govern the situation. Not having obtained the
certificate of incorporation, the Far Eastern Lumber
and Commercial Co. — even its stockholders — may
not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation
Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of
the Bureau of Commerce and Industry which
calls a corporation into being. The immunity
if collateral attack is granted to corporations
"claiming in good faith to be a corporation
under this act." Such a claim is compatible
with the existence of errors and irregularities;
but not with a total or substantial disregard of
the law. Unless there has been an evident
attempt to comply with the law the claim to
be a corporation "under this act" could not be
made "in good faith." (Fisher on the
Philippine Law of Stock Corporations, p.
75. See also Humphreys vs. Drew, 59 Fla.,
295; 52 So., 362.)
Second, this is not a suit in which the corporation is a
party. This is a litigation between stockholders of the
alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a de
jure corporation may be terminated in a private suit
for its dissolution between stockholders, without the
intervention of the state.
There might be room for argument on the right of
minority stockholders to sue for dissolution;1 but that
question does not affect the court's jurisdiction, and is
a matter for decision by the judge, subject to review
on appeal. Whkch brings us to one principal reason
why this petition may not prosper, namely: the
petitioners have their remedy by appealing the order
of dissolution at the proper time.
There is a secondary issue in connection with the
appointment of a receiver. But it must be admitted
that receivership is proper in proceedings for
dissolution of a company or corporation, and it was no
error to reject the counter-bond, the court having
declared the dissolution. As to the amount of the bond
to be demanded of the receiver, much depends upon
the discretion of the trial court, which in this instance
we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed,
with costs. The preliminary injunction heretofore
issued will be dissolved.
G.R. No. 125221 June 19, 1997
REYNALDO M. LOZANO, petitioner,
vs.
HON. ELIEZER R. DE LOS SANTOS, Presiding
Judge, RTC, Br. 58, Angeles City; and ANTONIO
ANDA, respondents.
PUNO, J.:
This petition for certiorari seeks to annul and set
aside the decision of the Regional Trial Court, Branch
58, Angeles City which ordered the Municipal Circuit
Trial Court, Mabalacat and Magalang, Pampanga to
dismiss Civil Case No. 1214 for lack of jurisdiction.
The facts are undisputed. On December 19, 1995,
petitioner Reynaldo M. Lozano filed Civil Case No.
1214 for damages against respondent Antonio Anda
before the Municipal Circuit Trial Court (MCTC),
Mabalacat and Magalang, Pampanga. Petitioner
alleged that he was the president of the Kapatirang
Mabalacat-Angeles Jeepney Drivers' Association, Inc.
(KAMAJDA) while respondent Anda was the
president of the Samahang Angeles-Mabalacat
Jeepney Operators' and Drivers' Association, Inc.
(SAMAJODA); in August 1995, upon the request of
the Sangguniang Bayan of Mabalacat, Pampanga,
petitioner and private respondent agreed to
consolidate their respective associations and form the
Unified Mabalacat-Angeles Jeepney Operators' and
Drivers Association, Inc. (UMAJODA); petitioner and
private respondent also agreed to elect one set of
officers who shall be given the sole authority to
collect the daily dues from the members of the
consolidated association; elections were held on
October 29, 1995 and both petitioner and private
respondent ran for president; petitioner won; private
respondent protested and, alleging fraud, refused to
recognize the results of the election; private
respondent also refused to abide by their agreement
and continued collecting the dues from the members
of his association despite several demands to desist.
Petitioner was thus constrained to file the complaint to
restrain private respondent from collecting the dues
and to order him to pay damages in the amount of
P25,000.00 and attorney's fees of P500.00. 1
Private respondent moved to dismiss the complaint for
lack of jurisdiction, claiming that jurisdiction was
lodged with the Securities and Exchange Commission
(SEC). The MCTC denied the motion on February 9,
1996. 2 It denied reconsideration on March 8, 1996. 3
Private respondent filed a petition
for certiorari before the Regional Trial Court, Branch
58, Angeles City. 4 The trial court found the dispute to
be intracorporate, hence, subject to the jurisdiction of
the SEC, and ordered the MCTC to dismiss Civil Case
No. 1214 accordingly. 5 It denied reconsideration on
May 31, 1996. 6
Hence this petition. Petitioner claims that:
THE RESPONDENT JUDGE
ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO
LACK OR EXCESS OF
JURISDICTION AND SERIOUS
ERROR OF LAW IN
CONCLUDING THAT THE
SECURITIES AND EXCHANGE
COMMISSION HAS
JURISDICTION OVER A CASE OF
DAMAGES BETWEEN
HEADS/PRESIDENTS OF TWO (2)
ASSOCIATIONS WHO INTENDED
TO CONSOLIDATE/MERGE
THEIR ASSOCIATIONS BUT NOT
YET [SIC] APPROVED AND
REGISTERED WITH THE
SECURITIES AND EXCHANGE
COMMISSION.7
The jurisdiction of the Securities and Exchange
Commission (SEC) is set forth in Section 5 of
Presidential Decree No. 902-A. Section 5 reads as
follows:
Sec. 5. . . . [T]he Securities and
Exchange Commission [has] original
and exclusive jurisdiction to hear and
decide cases involving:
(a) Devices or schemes employed by
or any acts of the board of directors,
business associates, its officers or
partners, amounting to fraud and
misrepresentation which may be
detrimental to the interest of the
public and/or of the stockholders,
partners, members of associations or
organizations registered with the
Commission.
(b) Controversies arising out of
intracorporate or partnership
relations, between and among
stockholders, members or associates;
between any or all of them and the
corporation, partnership or
association of which they are
stockholders, members, or associates,
respectively; and between such
corporation, partnership or
association and the state insofar as it
concerns their individual franchise or
right to exist as such entity.
(c) Controversies in the election or
appointment of directors, trustees,
officers or managers of such
corporations, partnerships or
associations.
(d) Petitions of corporations,
partnerships or associations to be
declared in the state of suspension of
payments in cases where the
corporation, partnership or
association possesses sufficient
property to cover all its debts but
foresees the impossibility of meeting
them when they respectively fall due
or in cases where the corporation,
partnership or association has no
sufficient assets to over its liabilities,
but is under the management of a
Rehabilitation Receiver or
Management Committee created
pursuant to this Decree.
The grant of jurisdiction to the SEC must be
viewed in the light of its nature and function
under the law. 8 This jurisdiction is
determined by a concurrence of two elements:
(1) the status or relationship of the parties;
and (2) the nature of the question that is the
subject of their controversy. 9
The first element requires that the controversy must
arise out of intracorporate or partnership relations
between and among stockholders, members, or
associates; between any or all of them and the
corporation, partnership or association of which they
are stockholders, members or associates, respectively;
and between such corporation, partnership or
association and the State in so far as it concerns their
individual franchises. 10 The second element requires
that the dispute among the parties be intrinsically
connected with the regulation of the corporation,
partnership or association or deal with the internal
affairs of the corporation, partnership or
association. 11 After all, the principal function of the
SEC is the supervision and control of corporations,
partnership and associations with the end in view that
investments in these entities may be encouraged and
protected, and their entities may be encouraged and
protected, and their activities pursued for the
promotion of economic development. 12
There is no intracorporate nor partnership relation
between petitioner and private respondent. The
controversy between them arose out of their plan to
consolidate their respective jeepney drivers' and
operators' associations into a single common
association. This unified association was, however,
still a proposal. It had not been approved by the SEC,
neither had its officers and members submitted their
articles of consolidation is accordance with Sections
78 and 79 of the Corporation Code. Consolidation
becomes effective not upon mere agreement of the
members but only upon issuance of the certificate of
consolidation by the SEC. 13 When the SEC, upon
processing and examining the articles of
consolidation, is satisfied that the consolidation of the
corporations is not inconsistent with the provisions of
the Corporation Code and existing laws, it issues a
certificate of consolidation which makes the
reorganization official. 14 The new consolidated
corporation comes into existence and the constituent
corporations dissolve and cease to exist. 15
The KAMAJDA and SAMAJODA to which
petitioner and private respondent belong are duly
registered with the SEC, but these associations are
two separate entities. The dispute between petitioner
and private respondent is not within the KAMAJDA
nor the SAMAJODA. It is between members of
separate and distinct associations. Petitioner and
private respondent have no intracorporate relation
much less do they have an intracorporate dispute. The
SEC therefore has no jurisdiction over the complaint.
The doctrine of corporation by estoppel 16 advanced
by private respondent cannot override jurisdictional
requirements. Jurisdiction is fixed by law and is not
subject to the agreement of the parties. 17 It cannot be
acquired through or waived, enlarged or diminished
by, any act or omission of the parties, neither can it be
conferred by the acquiescence of the court. 18
Corporation by estoppel is founded on principles of
equity and is designed to prevent injustice and
unfairness. 19 It applies when persons assume to form
a corporation and exercise corporate functions and
enter into business relations with third person. Where
there is no third person involved and the conflict
arises only among those assuming the form of a
corporation, who therefore know that it has not been
registered, there is no corporation by estoppel. 20
IN VIEW WHEREOF, the petition is granted and the
decision dated April 18, 1996 and the order dated May
31, 1996 of the Regional Trial Court, Branch 58,
Angeles City are set aside. The Municipal Circuit
Trial Court of Mabalacat and Magalang, Pampanga is
ordered to proceed with dispatch in resolving Civil
Case No. 1214. No costs.
SO ORDERED.
G.R. No. L-19118             June 16, 1965
MARIANO A. ALBERT, plaintiff-appellant,
vs.
UNIVERSITY PUBLISHING CO.,
INC., defendant-appellee.
Uy and Artiaga and Antonio M. Molina for plaintiff-
appellant.
Aruego, Mamaril and Associates for defendant-
appellee.
R E S O L U T I O N*
BENGZON, J.P., J.:
Defendant-appellee University Publishing Co., Inc.
has two prayers before us: First, that said defendant-
appellee be granted leave to present original papers
not included in the records of this case because they
were never presented in the trial of the case; and
second, that the decision promulgated by this Court on
January 30, 1965 be reconsidered.
For a proper appraisal of all the facts and
circumstances of this case it becomes necessary and
convenient to trace the origin of the same.
Plaintiff Albert, almost sixteen (16) years ago, sued
University Publishing Co., Inc. for breach of contract.
On April 18, 1958, in L-9300, this court awarded the
sum of P15,000.00 as damages. On October 24, 1960,
in L-15275, to clarify whether the P7,000.00 paid on
account should be deducted therefrom, this Court
decided that the amount should be paid in full because
said partial payment was already taken into
consideration when it fixed P15,000.00 as damages.
From the inception until the time when the decision in
L-15275 was to be executed, corporate existence on
the part of University Publishing Co., Inc. seems to
have been taken for granted, for it was not put in issue
in either of the cases abovementioned. However,
when the Court of First Instance of Manila issued on
July 22, 1961 an order of execution against University
Publishing Co., Inc., plaintiff, speaking also for the
Sheriff of Manila, reported to the Court by petition of
August 10, 1961 that there is no such entity as
University Publishing Co., Inc., thereupon praying
that, Jose M. Aruego being the real defendant, the writ
of execution be issued against him. Attached to said
petition was a certification from the Securities and
Exchange Commission dated July 31, 1961 attesting:
"The records of this Commission do not show the
registration of UNIVERSITY PUBLISHING CO.,
INC., either as a corporation or partnership." The
issue of its corporate existence was then clearly and
squarely presented before the court.
University Publishing Co., Inc., instead of informing
the lower court that it had in its possession copies of
its certificate of registration its by-laws, and all other
pertinent papers material to the point in dispute —
corporate existence — chose to remain silent thereon.
It merely countered the aforesaid petition by filing
through counsel (Jose M. Aruego's own law firm) a
manifestation stating that Jose M. Aruego is not a
party to this case and, therefore, plaintiff's petition
should be denied. After the court a quo denied the
request that a writ of execution be issued against Jose
M. Aruego, plaintiff brought this present appeal on
the issue of the corporate existence of University
Publishing Co., Inc., as determinative of the
responsibility of Jose M. Aruego, the person or
official who had always moved and acted for and in
behalf of University Publishing Co., Inc.
It may be worth noting again that Jose M. Aruego
started the negotiation which culminated in the
contract between the parties, signing said contract as
president of University Publishing Co., Inc. Likewise
he was the one who made partial payments up to the
amount of P7,000.00 for, and in behalf of University
Publishing Co., Inc. He also appeared not only as a
witness but as lawyer, signing some pleadings or
motions in defense of University Publishing Co., Inc.,
although in other instances it is one of his associates
or members of his law firm who did so. Known is the
fact that even a duly existing corporation can only
move and act through natural persons. In this case it
was Jose M. Aruego who moved and acted as or for
University, Publishing Co., Inc.
It is elemental that the courts can only decide the
merits of a given suit according to the records that are
in the case. It is true that in the two previous cases
decided by this Court, the first, awarding damages (L-
9300), the second, clarifying the amount of
P15,000.00 awarded as such (L-15275), the corporate
existence of University Publishing Co., Inc. as a legal
entity was merely taken for granted.
However, when the said issue was squarely presented
before the court, and University Publishing Co., Inc.
chose to keep the courts in the dark by withholding
pertinent documents and papers in its possession and
control, perforce this Court had to decide the points
raised according to the records of the case and
whatever related matters necessarily included therein.
Hence, as a consequence of the certification of the
Securities and Exchange Commission that its records
"do not show the registration of University Publishing
Co., Inc., either as a corporation or partnership," this
Court concluded that by virtue of its non-registration,
it can not be considered a corporation. We further said
that it has therefore no personality separate from Jose
M. Aruego and that Aruego was in reality the one who
answered and litigated through his own law firm
counsel. Stated otherwise, we found that Aruego was
in fact, if not in name, the defendant. 1 Indeed, the
judge of the court of first instance wrote in his
decision thus: "Defendant Aruego (all along the judge
who pens this decision considered that the defendant
here is the president of the University Publishing Co.,
Inc. since it was he who really made the contract with
Justice Albert) 2" And this portion of the decision
made by the court a quo was never questioned by the
defendant.
The above statement made by the court a quo in its
decision compelled this Court to carefully examine
the facts surrounding the dispute starting from the
time of the negotiation of the business proposition,
followed by the signing of the contract; considered the
benefits received; took into account the partial
payments made, the litigation conducted, the decisions
rendered and the appeals undertaken. After thus
considering the facts and circumstances, keeping in
mind that even with regard to corporations shown as
duly registered and existing, we have in many a case
pierced the veil of corporate fiction to administer the
ends of justice, 3 we held Aruego personally
responsible for his acts on behalf of University
Publishing Co., Inc.
Defendant would reply that in all those cases where
the Court pierced the veil of corporate fiction the
officials held liable were made party defendants. As
stated, defendant-appellee could not even pretend to
possess corporate fiction — in view to its non-
registration per the evidence — so that from the start
Aruego was the real defendant. Since the purpose of
formally impleading a party is to assure him a day in
court, once the protective mantle of due process of
law has in fact been accorded a litigant, whatever the
imperfection in form, the real litigant may be held
liable as a party. Jose M. Aruego definitely had his
day in court, and due process of law was enjoyed by
him as a matter of fact as revealed by the records of
the case. 4
The dispositive portion of the decision the
reconsideration of which is being sought is the
following: "Premises considered, the order appealed
from is hereby set aside and the case remanded
ordering the lower court to hold supplementary
proceedings for the purpose of carrying the judgment
into effect against University Publishing Co., Inc.
and/or Jose M. Aruego."
According to several cases a litigant is not allowed to
speculate on the decision the court may render in the
case. 5 The University Publishing Co., Inc. speculated
on a favorable decision based on the issue that Jose
M. Aruego, not being a formal party defendant in this
case, a writ of execution against him was not in order.
It, therefore, preferred to suppress vital documents
under its possession and control rather than to rebut
the certification issued by the Securities and Exchange
Commission that according to its records University
Publishing Co., Inc. was not registered. If the lower
court's order is sustained, collection of damages
becomes problematical. If a new suit is filed against
Aruego, prescription might be considered as effective
defense, aside from the prospect of another ten years
of pending litigation. Such are the possible reasons for
adopting the position of speculation of our decision.
Our ruling appeared to be unfavorable to such
speculation. It was only after the receipt of the adverse
decision promulgated by this Court that University
Publishing Co., Inc., disclosed its registration papers.
For purposes of this case only and according to its
particular facts and circumstances, we rule that in
view of the late disclosure of said papers by the
University Publishing Co., Inc., the same can no
longer considered at this stage of the proceedings.
Specifically said original papers are:
1. Original Certificate of Registration of the
University Publishing Co., Inc., signed by
then Director of Commerce, Cornelio
Balmaceda, showing that said company was
duly registered as a corporation with the
Mercantile Registry of the then Bureau of
Commerce (predecessor of the Securities and
Exchange Commission) as early as August 7,
1936;
2. Original copy of the Articles of
Incorporation of the University Publishing
Co., Inc consisting of five (5) pages, showing
that said corporation was incorporated as
early as August 1, 1936, Manila, Philippines,
with an authorized capital stock of TEN
THOUSAND PESOS (P10,000), TWO
THOUSAND PESOS (P2,000.00) of which
was fully subscribed and FIVE HUNDRED
PESOS (P500.00), fully paid up; that it had a
corporate existence of fifty (50) years and the
original incorporators of the same are: Jose
M. Aruego, Jose A. Adeva, Delfin T. Bruno
Enrique Rimando and Federico Mangahas;
3. The original copy of the By-Laws of the
University Publishing Co., Inc. consisting of
eleven (11) pages, showing that it exercised
its franchise as early as September 4, 1936;
4. A certificate of Reconstitution of Records
issued by the Securities and Exchange
Commission recognized the corporate
existence of the University Publishing, Co.,
Inc. as early as August 7, 1936.
Defendant-appellee could have presented the
foregoing papers before the lower court to counter the
evidence of non-registration, but defendant-appellee
did not do so. It could have reconstituted its records at
that stage of the proceedings, instead of only on April
1, 1965, after decision herein was promulgated.
It follows, therefore, that defendant-appellee may not
now be allowed to submit the abovementioned papers
to form part of the record. Sec. 7 of Rule 48, Rules of
Court (in relation to Sec. 1. Rule 42), invoked by
movant, states:
SEC. 7. Original papers may be required.
Whenever it is necessary or proper in the
opinion of the court that original papers of
any kind should be inspected in the court on
appeal, it may make such order for the
transmission, safekeeping, and return of such
original papers as may seem proper, and the
court may receive and consider such original
papers in connection with the record.
The provision obviously refers to papers
the originals of which are of record in the lower court,
which the appellate court may require to be
transmitted for inspection. The original papers in
question not having been presented before the lower
court as part of its record, the same cannot be
transmitted on appeal under the aforesaid section. In
contrast, the certification as to University Publishing
Co., Inc.'s non-registration forms part of the record in
the lower court.
For original papers not part of the lower court's
record, the applicable rule is Sec. 1 of Rule 59 on
New Trial. Under said Rule, the papers in question
cannot be admitted, because they are not "newly
discovered evidence ," for with due diligence movant
could have presented them in the lower court, since
they were in its possession and control.
As far as this case is concerned, therefore, University
Publishing Co., Inc. must be deemed as unregistered,
since by defendant-appellee's choice the record shows
it to be so. Defendant-appellee apparently sought to
delay the execution by remaining unregistered per the
certification of the Securities and Exchange
Commission. It was only when execution was to be
carried out, anyway, against it and/or its president —
and almost 19 years after the approval of the law
authorizing reconstitution — that it reconstituted its
records to show its registration, thereby once more
attempting to delay the payment of plaintiff's claim,
long since adjudged meritorious. Deciding, therefore,
as we must, this particular case on its record as
submitted by the parties, defendant-appellee's
proffered evidence of its corporate existence cannot at
this stage be considered to alter the decision reached
herein. This is not to preclude in future cases the
consideration of properly submitted evidence as to
defendant-appellee's corporate existence.
WHEREFORE, the motion for reconsideration and for
leave to file original papers not in the record, is
hereby denied. It is so ordered.
G.R. No. L-58028 April 18, 1989
CHIANG KAI SHEK SCHOOL, petitioner,
vs.
COURT OF APPEALS and FAUSTINA FRANCO
OH, respondents.
CRUZ, J.:
An unpleasant surprise awaited Fausta F. Oh when
she reported for work at the Chiang Kai Shek School
in Sorsogon on the first week of July, 1968. She was
told she had no assignment for the next semester. Oh
was shocked. She had been teaching in the school
since 1932 for a continuous period of almost 33 years.
And now, out of the blue, and for no apparent or given
reason, this abrupt dismissal.
Oh sued. She demanded separation pay, social
security benefits, salary differentials, maternity
benefits and moral and exemplary damages. 1 The
original defendant was the Chiang Kai Shek School
but when it filed a motion to dismiss on the ground
that it could not be sued, the complaint was
amended. 2 Certain officials of the school were also
impleaded to make them solidarily liable with the
school.
The Court of First Instance of Sorsogon dismissed the
complaint. 3 On appeal, its decision was set aside by
the respondent court, which held the school suable
and liable while absolving the other defendants. 4 The
motion for reconsideration having been denied, 5 the
school then came to this Court in this petition for
review on certiorari.
The issues raised in the petition are:
1. Whether or not a school that has not been
incorporated may be sued by reason alone of its long
continued existence and recognition by the
government,
2. Whether or not a complaint filed against persons
associated under a common name will justify a
judgment against the association itself and not its
individual members.
3. Whether or not the collection of tuition fees and
book rentals will make a school profit-making and not
charitable.
4. Whether or not the Termination Pay Law then in
force was available to the private respondent who was
employed on a year-to-year basis.
5. Whether or not the awards made by the respondent
court were warranted.
We hold against the petitioner on the first question. It
is true that Rule 3, Section 1, of the Rules of Court
clearly provides that "only natural or juridical persons
may be parties in a civil action." It is also not denied
that the school has not been incorporated. However,
this omission should not prejudice the private
respondent in the assertion of her claims against the
school.
As a school, the petitioner was governed by Act No.
2706 as amended by C.A. No. 180, which provided as
follows:
Unless exempted for special reasons
by the Secretary of Public Instruction,
any private school or college
recognized by the government shall
be incorporated under the provisions
of Act No. 1459 known as the
Corporation Law, within 90 days after
the date of recognition, and shall file
with the Secretary of Public
Instruction a copy of its incorporation
papers and by-laws.
Having been recognized by the government, it was
under obligation to incorporate under the Corporation
Law within 90 days from such recognition. It appears
that it had not done so at the time the complaint was
filed notwithstanding that it had been in existence
even earlier than 1932. The petitioner cannot now
invoke its own non-compliance with the law to
immunize it from the private respondent's complaint.
There should also be no question that having
contracted with the private respondent every year for
thirty two years and thus represented itself as
possessed of juridical personality to do so, the
petitioner is now estopped from denying such
personality to defeat her claim against it. According to
Article 1431 of the Civil Code, "through estoppel an
admission or representation is rendered conclusive
upon the person making it and cannot be denied or
disproved as against the person relying on it."
As the school itself may be sued in its own name,
there is no need to apply Rule 3, Section 15, under
which the persons joined in an association without any
juridical personality may be sued with such
association. Besides, it has been shown that the
individual members of the board of trustees are not
liable, having been appointed only after the private
respondent's dismissal. 6
It is clear now that a charitable institution is covered
by the labor laws 7 although the question was still
unsettled when this case arose in 1968. At any rate,
there was no law even then exempting such
institutions from the operation of the labor laws
(although they were exempted by the Constitution
from ad valorem taxes). Hence, even assuming that
the petitioner was a charitable institution as it claims,
the private respondent was nonetheless still entitled to
the protection of the Termination Pay Law, which was
then in force.
While it may be that the petitioner was engaged in
charitable works, it would not necessarily follow that
those in its employ were as generously motivated.
Obviously, most of them would not have the means
for such charity. The private respondent herself was
only a humble school teacher receiving a meager
salary of Pl80. 00 per month.
At that, it has not been established that the petitioner
is a charitable institution, considering especially that it
charges tuition fees and collects book rentals from its
students. 8 While this alone may not indicate that it is
profit-making, it does weaken its claim that it is a
non-profit entity.
The petitioner says the private respondent had not
been illegally dismissed because her teaching contract
was on a yearly basis and the school was not required
to rehire her in 1968. The argument is that her
services were terminable at the end of each year at the
discretion of the school. Significantly, no explanation
was given by the petitioner, and no advance notice
either, of her relief after teaching year in and year out
for all of thirty-two years, the private respondent was
simply told she could not teach any more.
The Court holds, after considering the particular
circumstance of Oh's employment, that she had
become a permanent employee of the school and
entitled to security of tenure at the time of her
dismissal. Since no cause was shown and established
at an appropriate hearing, and the notice then required
by law had not been given, such dismissal was
invalid.
The private respondent's position is no different from
that of the rank-and-file employees involved
in Gregorio Araneta University Foundation v.
NLRC, 9 of whom the Court had the following to say:
Undoubtedly, the private respondents'
positions as deans and department
heads of the petitioner university are
necessary in its usual business.
Moreover, all the private respondents
have been serving the university from
18 to 28 years. All of them rose from
the ranks starting as instructors until
they became deans and department
heads of the university. A person who
has served the University for 28 years
and who occupies a high
administrative position in addition to
teaching duties could not possibly be
a temporary employee or a casual.
The applicable law is the Termination Pay Law,
which provided:
SECTION 1. In cases of employment,
without a definite period, in a
commercial, industrial, or agricultural
establishment or enterprise, the
employer or the employee may
terminate at any time the employment
with just cause; or without just cause
in the case of an employee by serving
written notice on the employer at least
one month in advance, or in the case
of an employer, by serving such
notice to the employee at least one
month in advance or one-half month
for every year of service of the
employee, whichever, is longer, a
fraction of at least six months being
considered as one whole year.
The employer, upon whom no such
notice was served in case of
termination of employment without
just cause may hold the employee
liable for damages.
The employee, upon whom no such
notice was served in case of
termination of employment without
just cause shall be entitled to
compensation from the date of
termination of his employment in an I
amount equivalent to his salaries or
wages correspond to the required
period of notice. ... .
The respondent court erred, however, in awarding her
one month pay instead of only one-half month salary
for every year of service. The law is quite clear on this
matter. Accordingly, the separation pay should be
computed at P90.00 times 32 months, for a total of
P2,880.00.
Parenthetically, R.A. No. 4670, otherwise known as
the Magna Carta for Public School Teachers, confers
security of tenure on the teacher upon appointment as
long as he possesses the required
qualification. 10 And under the present policy of the
Department of Education, Culture and Sports, a
teacher becomes permanent and automatically
acquires security of tenure upon completion of three
years in the service. 11
While admittedly not applicable to the case at bar,
these I rules nevertheless reflect the attitude of the
government on the protection of the worker's security
of tenure, which is now guaranteed by no less than the
Constitution itself. 12
We find that the private respondent was arbitrarily
treated by the petitioner, which has shown no cause
for her removal nor had it given her the notice
required by the Termination Pay Law. As the
respondent court said, the contention that she could
not report one week before the start of classes is a
flimsy justification for replacing her. 13 She had been
in its employ for all of thirty-two years. Her record
was apparently unblemished. There is no showing of
any previous strained relations between her and the
petitioner. Oh had every reason to assume, as she had
done in previous years, that she would continue
teaching as usual.
It is easy to imagine the astonishment and hurt she felt
when she was flatly and without warning told she was
dismissed. There was not even the amenity of a
formal notice of her replacement, with perhaps a
graceful expression of thanks for her past services.
She was simply informed she was no longer in the
teaching staff. To put it bluntly, she was fired.
For the wrongful act of the petitioner, the private
respondent is entitled to moral damages. 14 As a
proximate result of her illegal dismissal, she suffered
mental anguish, serious anxiety, wounded feelings
and even besmirched reputation as an experienced
teacher for more than three decades. We also find that
the respondent court did not err in awarding her
exemplary damages because the petitioner acted in a
wanton and oppressive manner when it dismissed
her. 15
The Court takes this opportunity to pay a sincere
tribute to the grade school teachers, who are always at
the forefront in the battle against illiteracy and
ignorance. If only because it is they who open the
minds of their pupils to an unexplored world awash
with the magic of letters and numbers, which is an
extraordinary feat indeed, these humble mentors
deserve all our respect and appreciation.
WHEREFORE, the petition is DENIED. The appealed
decision is AFFIRMED except for the award of
separation pay, which is reduced to P2,880.00. All the
other awards are approved. Costs against the
petitioner.
This decision is immediately executory.
SO ORDERED.
G.R. No. 22106           September 11, 1924
ASIA BANKING CORPORATION, plaintiff-
appellee,
vs.
STANDARD PRODUCTS, CO., INC., defendant-
appellant.
Charles C. De Selms for appellant.
Gibbs & McDonough and Roman Ozaeta for
appellee.
OSTRAND, J.:
This action is brought to recover the sum of
P24,736.47, the balance due on the following
promissory note:
P37,757.22
MANILA, P. I.,     Nov. 28, 1921.
MANILA, P. I., Nov. 28, 1921.
On demand, after date we promise to pay to
the Asia Banking Corporation, or order, the
sum of thirty-seven thousand seven hundred
fifty-seven and 22/100 pesos at their office in
Manila, for value received, together with
interest at the rate of ten per cent per annum.
No. ________ Due __________
THE STANDARD PRODUCTS CO., INC.
        By     (Sgd.) GEORGE H. SEAVER
                By     President
The court below rendered judgment in favor of the
plaintiff for the sum demanded in the complaint, with
interest on the sum of P24,147.34 from November 1,
1923, at the rate of 10 per cent per annum, and the
costs. From this judgment the defendant appeals to
this court.
At the trial of the case the plaintiff failed to prove
affirmatively the corporate existence of the parties and
the appellant insists that under these circumstances the
court erred in finding that the parties were
corporations with juridical personality and assigns
same as reversible error.
There is no merit whatever in the appellant's
contention. The general rule is that in the absence of
fraud a person who has contracted or otherwise dealt
with an association in such a way as to recognize and
in effect admit its legal existence as a corporate body
is thereby estopped to deny its corporate existence in
any action leading out of or involving such contract or
dealing, unless its existence is attacked for cause
which have arisen since making the contract or other
dealing relied on as an estoppel and this applies to
foreign as well as to domestic corporations. (14 C. J.,
227; Chinese Chamber of Commerce vs. Pua Te
Ching, 14 Phil., 222.)
The defendant having recognized the corporate
existence of the plaintiff by making a promissory note
in its favor and making partial payments on the same
is therefore estopped to deny said plaintiff's corporate
existence. It is, of course, also estopped from denying
its own corporate existence. Under these
circumstances it was unnecessary for the plaintiff to
present other evidence of the corporate existence of
either of the parties. It may be noted that there is no
evidence showing circumstances taking the case out
of the rules stated.
The judgment appealed from is affirmed, with the
costs against the appellant. So ordered.
[G.R. No. L-11442. May 23, 1958.]
MANUELA T. VDA. DE
SALVATIERRA, Petitioner, v. HON. LORENZO
C. GARLITOS, in his capacity as Judge of the
Court of First Instance of Leyte, Branch II, and
SEGUNDINO REFUERZO, Respondents.
Jimenez, Tantuico, Jr. & Tolete for Petitioner.
Francisco Astilla for respondent Segundino
Refuerzo.
SYLLABUS
1. PLEADING AND PRACTICE; PETITION FOR
RELIEF; WHEN TO FILE PETITION. — Rule 38,
Section 3, of the Rules of Court treats of 2 periods
within which a petition for relief may be filed. The
petition must be filed within 60 days after the
petitioner learns of the judgment and not more than 6
months after the judgment or order was rendered, both
of which must be satisfied.
2. CORPORATION LAW; LIABILITY OF PERSON
DEALING WITH ASSOCIATION AS A
CORPORATE BODY; WHEN ESTOPPEL MAY
NOT BE INVOKED. — While as a general rule, a
person who deals with an association in such a way to
recognize its existence as a corporate body is estopped
from denying the same in an action arising out of such
transaction, yet this doctrine may not be held to be
applicable where fraud takes a part in the said
transaction. In the instant case, on plaintiff’s charge
that she was unaware of the fact that the defendant
corporation had no juridical personality, its president
gave no confirmation or denial of the same and the
circumstance surrounding the execution of the
contract lead to the inescapable conclusion that
plaintiff was really made to believe that such
corporation was duly organized in accordance with
law.
3. ID.; LIABILITY OF MEMBERS WHO ACT AS
AGENTS OF AN UNINCORPORATED
ASSOCIATION. — A corporation when registered
has a juridical personality separate and distinct from
its component members or stockholders and officers,
such that a corporation cannot be held liable for the
personal in indebtedness of a stockholder even if he
should be its president (Walter A. Smith Co. v. Ford,
SC-G. R. No. 42420) and conversely, a stockholder
cannot be held personally liable for any financial
obligation by the corporation in excess of his unpaid
subscription. But this rule is understood to refer
merely to registered corporations and cannot be made
applicable to the liability of members of an
unincorporated association. The reason behind this
doctrine is obvious - an unincorporated association
has no personality and would be incompetent to act
and appropriate for itself the power and attributes of a
corporation as provided by law, it cannot create agents
or confer authority on another to act in its behalf; thus,
those who act or purport to act as its representatives or
agents do so without authority and at their own risk.
And as it is an elementary principle of law that a
person who acts as an agent without authority or
without a principal is himself regarded as the
principal, possessed of all the right and subject to all
the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts performed as
such agent (Fay v. Noble, 7 Cushing [Mass. ] 188.
Cited in II Tolentino’s Commercial Laws of the
Philippines, Fifth Ed., p. 689-690).
DECISION
FELIX, J.:
This is a petition for certiorari filed by Manuela T.
Vda. de Salvatierra seeking to nullify the order of the
Court of First Instance of Leyte in Civil Case No.
1912, dated March 21, 1956, relieving Segundino
Refuerzo of liability for the contract entered into
between the former and the Philippine Fibers
Producers Co., Inc., of which Refuerzo is the
president. The facts of the case are as
follows:chanrob1es virtual 1aw library
Manuela T. Vda. de Salvatierra appeared to be the
owner of a parcel of land located at Maghobas,
Población, Burauen, Leyte. On March 7, 1954, said
landholder entered into a contract of lease with the
Philippine Fibers Producers Co., Inc., allegedly a
corporation "duly organized and existing under the
laws of the Philippines, domiciled at Burauen, Leyte,
Philippines, and with business address therein,
represented in this instance by Mr. Segundino Q.
Refuerzo, the President." It was provided in said
contract, among other things, that the lifetime of the
lease would be for a period of 10 years; that the land
would be planted to kenaf, ramie or other crops
suitable to the soil; that the lessor would be entitled to
30 per cent of the net income accruing from the
harvest of any crop without being responsible for the
cost of production thereof; and that after every
harvest, the lessee was bound to declare at the earliest
possible time the income derived therefrom and to
deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed
on the alleged corporation were not complied with
because on April 5, 1955, Manuela T. Vda. de
Salvatierra filed with the Court of First Instance of
Leyte a complaint against the Philippine Fibers
Producers Co., Inc., and Segundino Q. Refuerzo, for
accounting, rescission and damages (Civil Case No.
1912). She averred that sometime in April, 1954,
defendants planted kenaf on 3 hectares of the leased
property which crop was, at the time of the
commencement of the action, already harvested,
processed and sold by defendants; that
notwithstanding that fact, defendants refused to render
an accounting of the income derived therefrom and to
deliver the lessor’s share; that the estimated gross
income was P4,500, and the deductible expenses a
mounted to P1,000; that as defendants’ refusal to
undertake such task was in violation of the terms of
the covenant entered into between the plaintiff and
defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to
the complaint, of which they were allegedly notified,
the Court declared them in default and proceeded to
receive plaintiff’s evidence. On June 8, 1955, the
lower Court rendered judgment granting plaintiff’s
prayer, and required defendants to render a complete
accounting of the harvest of the land subject of the
proceeding within 15 days from receipt of the decision
and to deliver 30 per cent of the net income realized
from the last harvest to plaintiff, with legal interest
from the date defendants received payment for said
crop. It was further provided that upon defendants’
failure to abide by the said requirement, the gross
income would be fixed at P4,200 or a net income of
P3,200 after deducting the expenses for productions,
30 per cent of which or P960 was held to be due the
plaintiff pursuant to the aforementioned contract of
lease, which was declared rescinded.
No appeal therefrom having been perfected within the
reglementary period, the Court, upon motion of
plaintiff, issued a writ of execution, in virtue of which
the Provincial Sheriff of Leyte caused the attachment
of 3 parcels of land registered in the name of
Segundino Refuerzo. No property of the Philippine
Fibers Producers Co., Inc., was found available for
attachment.
On January 31, 1956, defendant Segundino Refuerzo
filed a motion claiming that the decision rendered in
said Civil Case No. 1912 was null and void with
respect to him, there being no allegation in the
complaint pointing to his personal liability and thus
prayed that an order be issued limiting such liability to
defendant corporation. Over plaintiff’s opposition, the
Court a quo granted the same and ordered the
Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been
attached, after finding that the evidence on record
made no mention or referred to any fact which might
hold movant personally liable therein. As plaintiff’s
petition for relief from said order was denied,
Manuela T. Vda. de Salvatierra instituted the instant
action asserting that the trial Judge in issuing the order
complained of, acted with grave abuse of discretion
and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that
the order sought to be nullified was issued by the
respondent Judge upon motion of defendant Refuerzo,
obviously pursuant to Rule 38 of the Rules of Court.
Section 3 of said Rule, however, in providing for the
period within which such a motion may be filed,
prescribes that:chanrob1es virtual 1aw library
SEC. 3. WHEN PETITION FILED; CONTENTS
AND VERIFICATION. — A petition provided for in
either of the preceding sections of this rule must be
verified, filed within sixty days after the petitioner
learns of the judgment, order, or other proceeding to
be set aside, and not more than six months after such
judgment or order was entered, or such proceeding
was taken; and must be accompanied with affidavit
showing the fraud, accident, mistake, or excusable
negligence relied upon, and the facts constituting the
petitioner’s good and substantial cause of action or
defense, as the case may be, which he may prove if
his petition be granted." (Rule 33)
The aforequoted provision treats of 2 periods, i.e., 60
days after petitioner learns of the judgment, and not
more than 6 months after the judgment or order was
rendered, both of which must be satisfied. As the
decision in the case at bar was under date of June 8,
1955, whereas the motion filed by respondent
Refuerzo was dated January 31, 1956, or after the
lapse of 7 months and 23 days, the filing of the
aforementioned motion was clearly made beyond the
prescriptive period provided for by the rules. The
remedy allowed by Rule 38 to a party adversely
affected by a decision or order is certainly an act of
grace or benevolence intended to afford said litigant a
penultimate opportunity to protect his interest.
Considering the nature of such relief and the purpose
behind it, the periods fixed by said rule are non-
extendible and never interrupted; nor could it be
subjected to any condition or contingency because it
is of itself devised to meet a condition or contingency
(Palomares v. Jimenez, * G. R. No. L-4513, January
31, 1952). On this score alone, therefore, the petition
for a writ of certiorari filed herein may be granted.
However, taking note of the question presented by the
motion for relief involved herein, We deem it wise to
delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any
liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers
Producers Co., Inc, interposed the defense that the
complaint filed with the lower court contained no
allegation which would hold him liable personally, for
while it was stated therein that he was a signatory to
the lease contract, he did so in his capacity as
president of the corporation. And this allegation was
found by the Court a quo to be supported by the
records. Plaintiff on the other hand tried to refute this
averment by contending that her failure to specify
defendant’s personal liability was due to the fact that
all the time she was under the impression that the
Philippine Fibers Producers Co., Inc., represented by
Refuerzo was a duly registered corporation as
appearing in the contract, but a subsequent inquiry
from the Securities & Exchange Commission yielded
otherwise. While as a general rule a person who has
contracted or dealt with an association in such a way
as to recognize its existence as a corporate body is
estopped from denying the same in an action arising
out of such transaction or dealing, (Asia Banking
Corporation v. Standard Products Co., 46 Phil., 144;
Compañia Agricola de Ultramar v. Reyes, 4 Phil., 1;
Ohta Development Co. v. Steamship Pompey, 49
Phil., 117), yet this doctrine may not be held to be
applicable where fraud takes a part in the said
transaction. In the instant case, on plaintiff’s charge
that she was unaware of the fact that the Philippine
Fibers Producers Co., Inc., had no juridical
personality, defendant Refuerzo gave no confirmation
or denial and the circumstances surrounding the
execution of the contract lead to the inescapable
conclusion that plaintiff Manuela T. Vda. de
Salvatierra was really made to believe that such
corporation was duly organized in accordance with
law.
There can be no question that a corporation when
registered has a juridical personality separate and
distinct from its component members or stockholders
and officers such that a corporation cannot be held
liable for the personal indebtedness of a stockholder
even if he should be its president (Walter A. Smith
Co. v. Ford, SC-G. R. No. 42420) and conversely, a
stockholder or member cannot be held personally
liable for any financial obligation by the corporation
in excess of his unpaid subscription. But this rule is
understood to refer merely to registered corporations
and cannot be made applicable to the liability of
members of an unincorporated association. The reason
behind this doctrine is obvious — since an
organization which before the law is non-existent has
no personality and would be incompetent to act and
appropriate for itself the powers and attribute of a
corporation as provided by law; it cannot create agents
or confer authority on another to act in its behalf; thus,
those who act or purport to act as its representatives or
agents do so without authority and at their own risk.
And as it is an elementary principle of law that a
person who acts as an agent without authority or
without a principal is himself regarded as the
principal, possessed of all the rights and subject to all
the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts performed as
such agent (Fay v. Noble, 7 Cushing [Mass. ] 188.
Cited in II Tolentino’s Commercial Laws of the
Philippines, Fifth Ed., p. 689-690). Considering that
defendant Refuerzo, as president of the unregistered
corporation Philippine Fibers Producers Co., Inc., was
the moving spirit behind the consummation of the
lease agreement by acting as its representative, his
liability cannot be limited or restricted to that imposed
upon corporate shareholders. In acting on behalf of a
corporation which he knew to be unregistered, he
assumed the risk of reaping the consequential [G.R. No. 119002. October 19, 2000.]
damages or resultant rights, if any, arising out of such
transaction. INTERNATIONAL EXPRESS TRAVEL &
TOUR SERVICES, INC., Petitioner, v. HON.
Wherefore, the order of the lower Court of March 21, COURT OF APPEALS, HENRI KAHN,
1956, amending its previous decision on this matter PHILIPPINES FOOTBALL
and ordering the Provincial Sheriff of Leyte to release
FEDERATION, Respondents.
any and all properties of movant therein which might
have been attached in the execution of such judgment,
is hereby set aside and nullified as if it had never been DECISION
issued. With costs against respondent Segundino
Refuerzo. It is so ordered.
KAPUNAN, J.:

On June 30 1989, petitioner International Express

Travel and Tour Services, Inc., through its managing
director, wrote a letter to the Philippine Football
Federation (Federation), through its president private
respondent Henri Kahn, wherein the former offered its
services as a travel agency to the latter. 1

The offer was accepted.chanrob1es virtua1 1aw

1ibrary

Petitioner secured the airline tickets for the trips of the

athletes and officials of the Federation to the South
East Asian Games in Kuala Lumpur as well as various
other trips to the People’s Republic of China and
Brisbane. The total cost of the tickets amounted to
P449,654.83. For the tickets received, the Federation
made two partial payments, both in September of
1989, in the total amount of P176,467.50. 2

On 4 October 1989, petitioner wrote the Federation,

through the private respondent a demand letter
requesting for the amount of P265,894.33. 3 On 30
October 1989, the Federation, through the Project
Gintong Alay, paid the amount of P31,603.00. 4

On 27 December 1989, Henri Kahn issued a personal

check in the amount of P50,000 as partial payment for
the outstanding balance of the Federation. 5
Thereafter, no further payments were made despite
repeated demands.chanrob1es virtua1 1aw 1ibrary

This prompted petitioner to file a civil case before the

Regional Trial Court of Manila. Petitioner sued Henri
Kahn in his personal capacity and as President of the
Federation and impleaded the Federation as an
alternative defendant. Petitioner sought to hold Henri
Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri
Kahn allegedly guaranteed the said obligation. 6

Henri Kahn filed his answer with counterclaim. While

not denying the allegation that the Federation owed
the amount P207,524.20, representing the unpaid
balance for the plane tickets, he averred that the
petitioner has no cause of action against him either in
his personal capacity or in his official capacity as
president of the Federation. He maintained that he; did
not guarantee payment but merely acted as an agent of
the Federation which has a separate and distinct
juridical personality. 7
On the other hand, the Federation failed to file its
answer, hence, was declared in default by the trial
court. 8 complaint against defendant Henri S. Kahn. 11
In due course, the trial court rendered judgment and
ruled in favor of the petitioner and declared Henri
Kahn personally liable for the unpaid obligation of the
Federation. In arriving at the said ruling, the trial court
rationalized:chanrob1es virtual 1aw library
Defendant Henri Kahn would have been correct in his
contentions had it been duly established that
defendant Federation is a corporation The trouble,
however, is that neither the plaintiff nor the defendant
Henri Kahn has adduced any evidence proving the
corporate existence of the defendant Federation. In
paragraph 2 of its complaint, plaintiff asserted that
"defendant Philippine Football Federation is a sports
association . . ." This has not been denied by
defendant Henri Kahn in his Answer. Being the
President of defendant Federation, its corporate
existence is within the personal knowledge of
defendant Henri Kahn. He could have easily denied
specifically the assertion of the plaintiff that it is a
mere sports association if it were a domestic
corporation. But he did not.
x       x       x
A voluntary unincorporated association, like
defendant Federation has no power to enter into, or to
ratify, a contract. The contract entered into by its
officers or agents on behalf of such association is not
binding on, or enforceable against it. The officers or
agents are themselves personally liable.
x       x       x 9 assigned
The dispositive portion of the trial court’s decision
reads:chanrob1es virtual 1aw library
WHEREFORE, judgment is rendered ordering
defendant Henri Kahn to pay the plaintiff the principal
sum of P207,524.20, plus the interest thereon at the
legal rate computed from July 5, 1990, the date the
complaint was filed, until the principal obligation is
fully liquidated; and another sum of P15,000.00 for
attorney’s fees.chanrob1es virtua1 1aw 1ibrary
The complaint of the plaintiff against the Philippine
Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn. 10
Only Henri Kahn elevated the above decision to the
Court of Appeals. On 21 December 1994, the
respondent court rendered a decision reversing the
trial court, the decretal portion of said decision
reads:chanrob1es virtual 1aw library
WHEREFORE, premises considered, the judgment
appealed from is hereby REVERSED and SET
ASIDE and another one is rendered dismissing the
In finding for Henri Kahn, the Court of Appeals
recognized the juridical existence of the Federation. It
rationalized that since petitioner failed to prove that
Henri Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same
as said entity has a separate and distinct personality
from its officers.
Petitioner filed a motion for reconsideration and as an
alternative prayer pleaded that the Federation be held
liable for the unpaid obligation. The same was denied
by the appellate court in its resolution of 8 February
1995, where it stated that:chanrob1es virtua1 1aw
1ibrary
As to the alternative prayer for the Modification of the
Decision by expressly declaring in the dispositive
portion thereof the Philippine Football Federation
(PFF) as liable for the unpaid obligation, it should be
remembered that the trial court dismissed the
complaint against the Philippine Football Federation,
and the plaintiff did not appeal from this decision.
Hence, the Philippine Football Federation is not a
party to this appeal and consequently, no judgment
may be pronounced by this Court against the PFF
without violating the due process clause, let alone the
fact that the judgment dismissing the complaint
against it, had already become final by virtue of the
plaintiff’s failure to appeal therefrom. The alternative
prayer is therefore similarly DENIED. 12
Petitioner now seeks recourse to this Court and alleges
that the respondent court committed the following
errors: 13
A. THE, HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT PETITIONER HAD
DEALT WITH THE PHILIPPINE FOOTBALL
FEDERATION (PFF) AS A CORPORATE ENTITY
AND IN NOT HOLDING THAT PRIVATE
RESPONDENT HENRI KAHN WAS THE ONE,
WHO REPRESENTED THE PFF AS HAVING
CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS
ERRED IN NOT HOLDING PRIVATE
RESPONDENT HENRI KAHN PERSONALLY
LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING
NEGOTIATED WITH PETITIONER AND
CONTRACTED THE OBLIGATION IN BEHALF
OF THE PFF, MADE A PARTIAL PAYMENT AN
ASSURED PETITIONER OF FULLY SETTLING
THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE
RESPONDENT KAHN IS NOT PERSONALLY
LIABLE, THE HONORABLE COURT OF
APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF
IS SOLELY LIABLE FOR THE
OBLIGATION.chanrob1es virtua1 1aw 1ibrary
The resolution of the case at bar hinges on the
determination of the existence of the Philippine
Football Federation as a juridical person. In the
assailed decision, the appellate court recognized the
existence of the Federation. In support of this, the CA
cited Republic Act 3135, otherwise known as the
Revised Charter of the Philippine Amateur Athletic
Federation, and Presidential Decree No. 604 as the
laws from which said Federation derives its
existence.chanrob1es virtua1 1aw 1ibrary
As correctly observed by the appellate court, both
R.A. 3135 and P.D. No. 604 recognized the juridical
existence of national sports associations. This may be
gleaned from the powers and functions granted to
these associations. Section 14 of R.A. 3135
provides:chanrob1es virtual 1aw library
SECTION 14. Functions, powers and duties of
Associations. — The National Sports’ Association
shall have the following functions, powers and
duties:chanrob1es virtual 1aw library
1. To adopt a constitution and by-laws for their
internal organization and government.
2. To raise funds by donations benefits, and other
means for their purposes.
3. To purchase, sell, lease or otherwise encumber
property both real and personal, for the
accomplishment of their purpose;
4. To affiliate with international or regional sports’
Associations after due consultation with the executive
committee;
x       x       x
13. To perform such other acts as may be necessary
for the proper accomplishment of their purposes and
not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to
these sports associations:chanrob1es virtual 1aw
library
SECTION. 8. Functions, Powers, and Duties of
National Sports Association. — The National sports
associations shall have the following functions,
powers, and duties:chanrob1es virtual 1aw library
1. Adopt a Constitution and By-Laws for their internal
organization and government which shall be
submitted to the Department and any amendment
hereto shall take effect upon approval by the
Department: Provided, however, That no team,
school, club, organization or entity shall be admitted
as a voting member of an association unless 60 per
cent of the athletes composing said team, school, club,
organization or entity are Filipino citizens.
2. Raise funds by donations, benefits, and other means
for their purpose subject to the approval of the
Department;
3. Purchase, sell, lease, or otherwise encumber
property, both real and personal, for the
accomplishment of their purpose;
4. Conduct local, interport, and international
competitions, other than the Olympic and Asian
Games, for the promotion of their sport;
5. Affiliate with international or regional sports
associations after due consultation with the
Department;
x       x       x
13. Perform such other functions as may be provided
by law.
The above powers and functions granted to national
sports associations clearly indicate that these entities
may acquire a juridical personality. The power to
purchase, sell, lease and encumber property are acts
which may only be done by persons, whether natural
or artificial, with juridical capacity. However, while
we agree with the appellate court that national sports
associations may be accorded corporate status, such
does not automatically take place by the mere passage
of these laws.chanrob1es virtua1 1aw 1ibrary
It is a basic postulate that before a corporation may
acquire juridical personality, the State must give its
consent either in the form of a special law or a general
enabling act. We cannot agree with the view of the
appellate court; and the private respondent that the
Philippine Football Federation came into existence
upon the passage of these laws. Nowhere can it be
found in R.A. 3135 or P.D. 604 any provision creating
the Philippine Football Federation. These laws merely
recognized the existence of national sports
associations and provided the manner by which these
entities may acquire juridical personality. Section 11
of R.A. 3135 provides:chanrob1es virtual 1aw library
SECTION 11. National Sports’ Association;
organization and recognition. — A National
Association shall be organized for each individual
sports in the Philippines in the manner hereinafter
provided to constitute the Philippine Amateur Athletic
Federation. Applications for recognition as a National
Sports’ Association shall be filed with the executive
committee together with, among others, a copy of the
constitution and by-laws and a list of the members of
the proposed association, and a filing fee of ten pesos.
The Executive Committee shall give the recognition
applied for if it is satisfied that said association will
promote the purposes of this Act and particularly
section three thereof. No application shall be held
pending for more than three months after the filing
thereof without any action having been taken thereon
by the executive committee. Should the application be
rejected, the reasons for such rejection shall be clearly
stated in a written communication to the applicant.
Failure to specify the reasons for the rejection shall
not affect the application which shall be considered as
unacted upon: Provided however, That until the
executive committee herein provided shall have been
formed, applications for recognition shall be passed
upon by the duly elected members of the present
executive committee of the Philippine Amateur
Athletic Federation. The said executive committee
shall be dissolved upon the organization of the
executive committee herein provided: Provided,
further, That the functioning executive committee is
charged with the responsibility of seeing to it that the
National Sports’ Associations are formed and
organized within six months from and after the
passage of this Act.chanrob1es virtua1 1aw 1ibrary
Section 7 of P.D. 604, similarly provides:chanrob1es
virtual 1aw library
SECTION 7. National Sports Associations: —
Application for accreditation or recognition as a
national sports association for each individual sport in
the Philippines shall be filed with the Department
together with, among others, a copy of the
Constitution and By-Laws and a list of the members
of the proposed association.
The Department shall give the recognition applied for
if it is satisfied that the national sports association to
be organized will promote the objectives of this
Decree and has substantially complied with the rules
and regulations of the Department: Provided, That the
Department may withdraw accreditation or
recognition for violation of this Decree and such rules
and regulations formulated by it.
The Department shall supervise the national sports
association: Provided, That the latter shall have
exclusive technical control over the development and
promotion of the particular sport for which they are
organized.
Clearly the above cited provisions require that before
an entity may be considered as a national sports
association, such entity must be recognized by the
accrediting organization, the Philippine, Amateur
Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under
P.D. 604.
This fact of recognition, however, Henri Kahn failed
to substantiate. In attempting to prove the juridical
existence of the Federation, Henri Kahn attached to
his motion for reconsideration before the trial court a
copy of the constitution and by-laws of the Philippine,
Football Federation. Unfortunately, the same does not
prove that said Federation has indeed been recognized
and accredited by either the Philippine Amateur
Athletic Federation or the Department of Youth and
Sports Development. Accordingly, we rule that the
Philippine Football Federation is not a national sports
association within the purview of the aforementioned
laws and does not have corporate existence of its
own.chanrob1es virtua1 1aw 1ibrary
Thus being said, it follows that private respondent
Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football
Federation. It is a settled principal in corporation law
that any person acting or purporting to act on behalf of
a corporation which has no valid existence assumes
such privileges and becomes personally liable for
contract entered into or for other acts performed as
such agent. 14 As president of the Federation, Henri
Kahn is presumed to have known about the corporate
existence or non-existence of the Federation. We
cannot subscribe to the position taken by the appellate
court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny
the corporate existence of the Federation because it
had contracted and dealt with the Federation in such a
manner as to recognize and in effect admit its
existence. 15 The doctrine of corporation by estoppel
is mistakenly applied by the respondent court to the
petitioner. The application of the doctrine applies to a
third party only when he tries to escape liabilities on a
contract from which he has benefited on the irrelevant
ground of defective incorporation. 16 In the case at
bar, the petitioner is not trying to escape liability from
the contract but rather is the one claiming from the
contract.
WHEREFORE, the decision appealed from is
REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil
Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
G.R. No. 109272 August 10, 1994
GEORG GROTJAHN GMBH & CO., petitioner,
vs.
HON. LUCIA VIOLAGO ISNANI, Presiding
Judge, Regional Trial Court, Makati, Br. 59;
ROMANA R. LANCHINEBRE; and TEOFILO A.
LANCHINEBRE, respondents.
A.M. Sison, Jr. & Associates for petitioner.
Pedro L. Laso for private respondents.
PUNO, J.:
Petitioner impugns the dismissal of its Complaint for
a sum of money by the respondent judge for lack of
jurisdiction and lack of capacity to sue.
The records show that petitioner is a multinational
company organized and existing under the laws of the
Federal Republic of Germany. On July 6, 1983,
petitioner filed an application, dated July 2,
1983, 1 with the Securities and Exchange Commission
(SEC) for the establishment of a regional or area
headquarters in the Philippines, pursuant to
Presidential Decree No. 218. The application was
approved by the Board of Investments (BOI) on
September 6, 1983. Consequently, on September 20,
1983, the SEC issued a Certificate of Registration and
License to petitioner. 2
Private respondent Romana R. Lanchinebre was a
sales representative of petitioner from 1983 to mid-
1992. On March 12, 1992, she secured a loan of
twenty-five thousand pesos (P25,000.00) from
petitioner. On March 26 and June 10, 1992, she made
additional cash advances in the sum of ten thousand
pesos (P10,000.00). Of the total amount, twelve
thousand one hundred seventy pesos and thirty-seven
centavos (P12,170.37) remained unpaid. Despite
demand, private respondent Romana failed to settle
her obligation with petitioner.
On July 22, 1992, private respondent Romana
Lanchinebre filed with the Arbitration Branch of the
National Labor Relations Commission (NLRC) in
Manila, a Complaint for illegal suspension, dismissal
and non-payment of commissions against petitioner.
On August 18, 1992, petitioner in turn filed against
private respondent a Complaint for damages
amounting to one hundred twenty thousand pesos
(P120,000.00) also with the NLRC Arbitration Branch
(Manila). 3 The two cases were consolidated.
On September 2, 1992, petitioner filed another
Complaint for collection of sum of money against
private respondents spouses Romana and Teofilo
Lanchinebre which was docketed as Civil Case No.
92-2486 and raffled to the sala of respondent judge.
Instead of filing their Answer, private respondents
moved to dismiss the Complaint. This was opposed by
petitioner.
On December 21, 1992, respondent judge issued the
first impugned Order, granting the motion to dismiss.
She held, viz:
Jurisdiction over the subject matter or
nature of the action is conferred by
law and not subject to the whims and
caprices of the parties.
Under Article 217 of the Labor Code
of the Philippines, the Labor Arbiters
shall have original and exclusive
jurisdiction to hear and decide, within
thirty (30) calendar days after the
submission of the case by the parties
for decision, the following cases
involving all workers, whether
agricultural or non-agricultural:
(4) claims for actual, moral,
exemplary and other forms of
damages arising from an employer-
employee relations.
xxx xxx xxx
(6) Except claims for employees
compensation, social security,
medicare and maternity benefits, all
other claims arising from employer-
employee relations, including those of
persons in domestic or household
service, involving an amount
exceeding five thousand pesos
(P5,000.00) regardless of whether or
not accompanied with a claim for
reinstatement.
In its complaint, the plaintiff
(petitioner herein) seeks to recover
alleged cash advances made by
defendant (private respondent herein)
Romana Lanchinebre while the latter
was in the employ of the former.
Obviously the said cash advances
were made pursuant to the employer-
employee relationship between the
(petitioner) and the said (private
respondent) and as such, within the
original and exclusive jurisdiction of
the National Labor Relations
Commission.
Again, it is not disputed that the
Certificate of Registration and
License issued to the (petitioner) by
the Securities and Exchange
Commission was merely "for the
 establishment of a regional or area
headquarters in the Philippines,
pursuant to Presidential Decree No.
218 and its implementing rules and
regulations." It does not include a
license to do business in the
Philippines. There is no allegation in
the complaint moreover that
(petitioner) is suing under an isolated
transaction. It must be considered that
under Section 4, Rule 8 of the
Revised Rules of Court, facts
showing the capacity of a party to sue
or be sued or the authority of a party
to sue or be sued in a representative
capacity or the legal existence of an
organized association of persons that
is made a party must be averred.
There is no averment in the complaint
regarding (petitioner's) capacity to
sue or be sued.
Finally, (petitioner's) claim being
clearly incidental to the occupation or
exercise of (respondent) Romana
Lanchinebre's profession,
(respondent) husband should not be
joined as party defendant. 4
On March 8, 1993, the respondent judge issued a
minute Order denying petitioner's Motion for
Reconsideration.
Petitioner now raises the following assignments of
errors:
I NLRC can resolve in the exercise of their adjudicatory
THE TRIAL COURT GRAVELY
ERRED IN HOLDING THAT THE
REGULAR COURTS HAVE NO
JURISDICTION OVER DISPUTES
BETWEEN AN EMPLOYER AND
AN EMPLOYEE INVOLVING THE
APPLICATION PURELY OF THE
GENERAL CIVIL LAW.
II
THE TRIAL COURT GRAVELY
ERRED IN HOLDING THAT
PETITIONER HAS NO CAPACITY
TO SUE AND BE SUED IN THE
PHILIPPINES DESPITE THE FACT
THAT PETITIONER IS DULY
LICENSED BY THE SECURITIES
AND EXCHANGE COMMISSION
TO SET UP AND OPERATE A
REGIONAL OR AREA
HEADQUARTERS IN THE
COUNTRY AND THAT IT HAS
CONTINUOUSLY OPERATED AS
SUCH FOR THE LAST NINE (9)
YEARS.
III
THE TRIAL COURT GRAVELY
ERRED IN HOLDING THAT THE
ERRONEOUS INCLUSION OF
THE HUSBAND IN A
COMPLAINT IS A FATAL
DEFECT THAT SHALL RESULT
IN THE OUTRIGHT DISMISSAL
OF THE COMPLAINT.
IV
THE TRIAL COURT GRAVELY
ERRED IN HOLDING THAT THE
HUSBAND IS NOT REQUIRED BY
THE RULES TO BE JOINED AS A
DEFENDANT IN A COMPLAINT
AGAINST THE WIFE.
There is merit to the petition.
Firstly, the trial court should not have held itself
without jurisdiction over Civil Case No. 92-2486. It is
true that the loan and cash advances sought to be
recovered by petitioner were contracted by private
respondent Romana Lanchinebre while she was still in
the employ of petitioner. Nonetheless, it does not
follow that Article 217 of the Labor Code covers their
relationship.
Not every dispute between an employer and employee
involves matters that only labor arbiters and the
or quasi-judicial powers. The jurisdiction of labor
arbiters and the NLRC under Article 217 of the Labor
Code is limited to disputes arising from an employer-
employee relationship which can only be resolved by
reference to the Labor Code, other labor statutes, or
their collective bargaining agreement. In this regard,
we held in the earlier case of Molave Motor Sales,
Inc. vs. Laron, 129 SCRA 485 (1984), viz:
Before the enactment of BP Blg. 227
on June 1, 1982, Labor Arbiters,
under paragraph 5 of Article 217 of
the Labor Code had jurisdiction over
"all other cases arising from
employer-employee relation, unless
expressly excluded by this Code."
Even then, the principal followed by
this Court was that, although a
controversy is between an employer
and an employee, the Labor Arbiters
have no jurisdiction if the Labor Code
is not involved. In Medina vs. Castro-
Bartolome, 116 SCRA 597, 604 in
negating jurisdiction of the Labor
Arbiter, although the parties were an
 employer and two employees, Mr. where the claim to the principal relief
Justice Abad Santos stated: sought is to be resolved not by
reference to the Labor Code or other
The pivotal question labor relations statute or a collective
to Our mind is bargaining agreement but by the
whether or not the general civil law, the jurisdiction over
Labor Code has any the dispute belongs to the regular
relevance to the courts of justice and not to the Labor
reliefs sought by Arbiter and the NLRC. In such
plaintiffs. For if the situations, resolutions of the dispute
Labor Code has no requires expertise, not in labor
relevance, any management relations nor in wage
discussion structures and other terms and
concerning the conditions of employment, but rather
statutes amending it in the application of the general civil
and whether or not law. Clearly, such claims fall outside
they have retroactive the area of competence or expertise
effect is unnecessary. ordinarily ascribed to Labor Arbiters
and the NLRC and the rationale for
xxx xxx xxx granting jurisdiction over such claims
to these agencies disappears.
And in Singapore Airlines Limited vs.
Paño, 122 SCRA 671, 677, the Civil Case No. 92-2486 is a simple collection of a
following was said: sum of money brought by petitioner, as creditor,
against private respondent Romana Lanchinebre, as
Stated differently, debtor. The fact that they were employer and
petitioner seeks employee at the time of the transaction does not
protection under the negate the civil jurisdiction of the trial court. The case
civil laws and claims does not involve adjudication of a labor dispute but
no benefits under the recovery of a sum of money based on our civil laws
Labor Code. The on obligation and contract.
primary relief sought
is for liquidated Secondly, the trial court erred in holding that
damages for breach petitioner does not have capacity to sue in the
of a contractual Philippines. It is clear that petitioner is a foreign
obligation. The other corporation doing business in the Philippines.
items demanded are Petitioner is covered by the Omnibus Investment
not labor benefits Code of 1987. Said law defines "doing business," as
demanded by follows:
workers generally
taken cognizance of . . . shall include soliciting orders,
in labor disputes, purchases, service contracts, opening
such as payment of offices, whether called "liaison"
wages, overtime offices or branches; appointing
compensation or representatives or distributors who are
separation pay. The domiciled in the Philippines or who in
items claimed are the any calendar year stay in the
natural consequences Philippines for a period or periods
flowing from breach totalling one hundred eighty (180)
of an obligation, days or more; participating in the
intrinsically a civil management, supervision or control
dispute. of any domestic business firm, entity
or corporation in the Philippines, and
x x x           x x x          x x x any other act or acts that imply a
continuity of commercial dealings or
In San Miguel Corporation vs. NLRC, 161 SCRA 719 arrangements and contemplate to that
(1988), we crystallized the doctrines set forth in extent the performance of acts or
the Medina, Singapore Airlines, and Molave works, or the exercise of some of the
Motors cases, thus: functions normally incident to, and in
progressive prosecution of,
. . . The important principle that runs commercial gain or of the purpose
through these three (3) cases is that and object of the business
organization. 5
There is no general rule or governing principle as to absence of relevant evidence, the issue cannot be
what constitutes "doing" or "engaging in" or resolved in a motion to dismiss.
"transacting" business in the Philippines. Each case
must be judged in the light of its peculiar IN VIEW WHEREOF, the instant Petition is
circumstances. 6 In the case at bench, petitioner does GRANTED. The Orders, dated December 21, 1992
not engage in commercial dealings or activities in the and March 8, 1993, in Civil Case No. 92-2486 are
country because it is precluded from doing so by P.D. REVERSED AND SET ASIDE. The RTC of Makati,
No. 218, under which it was Br. 59, is hereby ordered to hear the reinstated case on
established. 7 Nonetheless, it has been continuously, its merits. No costs.
since 1983, acting as a supervision, communications
and coordination center for its home office's affiliates SO ORDERED.
in Singapore, and in the process has named its local
agent and has employed Philippine nationals like
private respondent Romana Lanchinebre. From this
uninterrupted performance by petitioner of acts
pursuant to its primary purposes and functions as a
regional/area headquarters for its home office, it is
clear that petitioner is doing business in the country.
Moreover, private respondents are estopped from
assailing the personality of petitioner. So we held
in Merrill Lynch Futures, Inc. vs. Court of Appeals,
211 SCRA 824, 837 (1992):

The rule is that a party is estopped to

challenge the personality of a
corporation after having
acknowledged the same by entering
into a contract with it. And the
"doctrine of estoppel to deny
corporate existence applies to foreign
as well as to domestic corporations;"
"one who has dealth with a
corporation of foreign origin as a
corporate entity is estopped to deny
its corporate existence and capacity."
The principle "will be applied to
prevent a person contracting with a
foreign corporation from later taking
advantage of its noncompliance with
the statutes chiefly in cases where
such person has received the benefits
of the contract, . . . (Citations
omitted.)

Finally, the trial court erred when it dismissed Civil

Case No. 92-2486 on what it found to be the
misjoinder of private respondent Teofilo Lanchinebre
as party defendant. It is a basic rule that "(m)isjoinder
or parties is not ground for dismissal of an
action."8 Moreover, the Order of the trial court is
based on Section 4(h), Rule 3 of the Revised Rules of
Court, which provides:

A married woman may not . . . be

sued alone without joining her
husband, except . . . if the litigation is
incidental to the profession,
occupation or business in which she is
engaged,

Whether or not the subject loan was incurred by

private respondent as an incident to her profession,
occupation or business is a question of fact. In the